NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, expect share data and where indicated)
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1.
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Background and Basis of Presentation
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Background
Mallinckrodt plc is a global business of multiple wholly owned subsidiaries (collectively, "Mallinckrodt" or "the Company") that develop, manufacture, market and distribute specialty pharmaceutical products and therapies. Areas of focus include autoimmune and rare diseases in specialty areas like neurology, rheumatology, nephrology, pulmonology and ophthalmology; immunotherapy and neonatal respiratory critical care therapies; analgesics and gastrointestinal products.
The Company operates in two reportable segments, which are further described below:
•Specialty Brands includes innovative specialty pharmaceutical brands; and
•Specialty Generics includes niche specialty generic drugs and active pharmaceutical ingredients "("API(s)").
The Company is incorporated and maintains its principal executive offices in Ireland. The Company continues to be subject to United States ("U.S.") Securities and Exchange Commission ("SEC") reporting requirements.
Basis of Presentation
The consolidated financial statements have been prepared in U.S. dollars and in accordance with accounting principles generally accepted in the U.S. ("GAAP"). The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results may differ from those estimates. The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and entities in which they own or control more than 50.0% of the voting shares, or have the ability to control through similar rights. All intercompany balances and transactions have been eliminated in consolidation and all normal recurring adjustments necessary for a fair presentation have been included in the results reported.
The results of entities disposed of are included in the consolidated financial statements up to the date of disposal and, where appropriate, these operations have been reflected as discontinued operations. Divestitures of product lines not meeting the criteria for discontinued operations have been reflected in operating loss.
Going Concern
The accompanying consolidated financial statements are prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
On October 12, 2020, Mallinckrodt plc and certain of its subsidiaries voluntarily initiated proceedings (the "Chapter 11 Cases") under chapter 11 of title 11 ("Chapter 11") of the United States Code (the "Bankruptcy Code"), to modify its capital structure, including restructuring portions of its debt, and resolve potential legal liabilities, including but not limited to those described in Note 20 as Opioid-Related Matters and Acthar Gel-Related Matters. In connection with the filing of the Chapter 11 Cases, the Company entered into a Restructuring Support Agreement (as amended, supplemented or otherwise modified, the "RSA") (further detail for which is provided in Note 2) as part of a prearranged plan of reorganization. See Note 2 for further information on the voluntary petitions for reorganization and the RSA.
Substantial doubt about the Company's ability to continue as a going concern exists in light of its Chapter 11 Cases. The Company's ability to continue as a going concern is contingent upon, among other things, its ability to, subject to the approval by the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), implement a plan of reorganization, emerge from the Chapter 11 proceedings and generate sufficient liquidity following the reorganization to meet its obligations, most notably its opioid and Acthar® Gel (repository corticotropin injection) ("Acthar Gel")-related settlements, restructured debt obligations, and operating needs.
Although management believes that the reorganization of the Company through the Chapter 11 proceedings will appropriately position the Company upon emergence, the commencement of these proceedings constituted an event of default under certain of the Company’s debt agreements, enforcement of any remedies in respect of which is automatically stayed as a result of the Chapter 11 proceedings. There are a number of risks and uncertainties associated with the Company’s bankruptcy, including, among others that: (a) the Company’s prearranged plan of reorganization may never be confirmed or become effective, (b) the RSA may be terminated by
one or more of the parties thereto, (c) the Bankruptcy Court may grant or deny motions in a manner that is adverse to the Company and its subsidiaries, and (d) the Chapter 11 Cases may be converted into cases under chapter 7 of the Bankruptcy Code.
The transactions contemplated by the RSA are subject to approval by the Bankruptcy Court, among other conditions. Accordingly, no assurance can be given that the transactions described therein will be consummated. As a result, the Company has concluded that management’s plans at this stage do not alleviate substantial doubt about the Company’s ability to continue as a going concern.
The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might result from the outcome of this uncertainty.
Pursuant to sections 1107(a) and 1108 of the Bankruptcy Code, the Debtors (as defined in Note 2) retain control of their assets and are authorized to operate their business as debtors-in-possession while being subject to the jurisdiction of the Bankruptcy Court. While operating as debtors-in-possession under Chapter 11, the Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business and subject to applicable orders of the Bankruptcy Court, for amounts other than those reflected in the accompanying consolidated financial statements. Any such actions occurring during the Chapter 11 Cases authorized by the Bankruptcy Court could materially impact the amounts and classifications of assets and liabilities reported in the Company's consolidated financial statements. For more information regarding the Chapter 11 Cases, see Note 2.
Fiscal Year
The Company reports its results based on a "52-53 week" year ending on the last Friday of December. Fiscal 2020, 2019 and 2018 each consisted of 52 weeks. Unless otherwise indicated, fiscal 2020, 2019 and 2018 refer to the Company's fiscal years ended December 25, 2020, December 27, 2019 and December 28, 2018, respectively.
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2.
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Bankruptcy Proceedings
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Voluntary Filing Under Chapter 11
On October 12, 2020 (the "Petition Date"), Mallinckrodt plc and certain of its subsidiaries voluntarily initiated the Chapter 11 Cases under the Bankruptcy Code in the Bankruptcy Court to effectuate settlements contemplated in the RSA. The entities that filed the Chapter 11 Cases include the Company, substantially all of the Company’s U.S. subsidiaries, including certain subsidiaries of Mallinckrodt plc operating the Specialty Generics business (the "Specialty Generics Subsidiaries") and the Specialty Brands business (the "Specialty Brands Subsidiaries"), and certain of the Company’s international subsidiaries (together with the Company, Specialty Generics Subsidiaries and Specialty Brands Subsidiaries, the "Debtors"). The Chapter 11 Cases are being jointly administered under the caption In re Mallinckrodt plc, Case No. 20-12522 (JTD). Information about the Chapter 11 Cases, including the case docket, may be found free of charge at https://restructuring.primeclerk.com/Mallinckrodt/.
The Debtors continue to operate their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As debtors in possession, the Debtors are authorized to continue to operate as ongoing businesses, and may pay all debts and honor all obligations arising in the ordinary course of their businesses after the Petition Date. However, the Debtors may not pay third-party claims or creditors on account of obligations arising before the Petition Date or engage in transactions outside the ordinary course of business without approval of the Bankruptcy Court.
Under the Bankruptcy Code, third-party actions to collect pre-petition indebtedness owed by the Debtors, as well as most litigation pending against the Company as of the Petition Date, are subject to an automatic stay. However, under the Bankruptcy Code, certain regulatory or criminal proceedings generally are not subject to the automatic stay and may continue unless otherwise ordered by the Bankruptcy Court. Absent an order of the Bankruptcy Court providing otherwise, substantially all pre-petition liabilities will be resolved under a Chapter 11 plan of reorganization.
Among other requirements, a Chapter 11 plan of reorganization must comply with the priority scheme established by the Bankruptcy Code, under which certain post-petition and secured or “priority” pre-petition liabilities need to be satisfied before general unsecured creditors and holders of the Company's equity are entitled to receive any distribution. Upon solicitation of the plan of reorganization to creditors, with an accompanying court-approved disclosure statement, certain impaired creditors and interest holders will vote by ballot to approve or reject the plan. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 Cases to the claims and interests of each of these constituencies. See Restructuring Support Agreement section below for contemplated distributions to creditors and interest holders.
Under the Bankruptcy Code, the Debtors may assume, modify, assign or reject certain executory contracts and unexpired leases, including, without limitation, leases of real property and equipment, subject to the approval of the Bankruptcy Court and to certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such
executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease in this Annual Report on Form 10-K, including, where applicable, the express termination rights thereunder or a quantification of their obligations, must be read in conjunction with, and is qualified by, any overriding rejection rights the Debtors have under the Bankruptcy Code.
As discussed further below, the Debtors obtained approval from the Bankruptcy Court for certain "first day" motions, including motions to obtain customary relief intended to continue ordinary course operations after the Petition Date.
Significant Bankruptcy Court Actions
First Day Motions
On October 14, 2020, the Debtors received Bankruptcy Court approval of their customary motions filed on the Petition Date ("First Day Motions") on an interim basis seeking court authorization to continue to support its business operations during the Chapter 11 Cases, including the continued payment of employee wages and benefits without interruption, payment of critical and foreign vendors, continuation of customer programs, continuation of use of existing cash management programs and allowance of certain financing payments under a cash collateral order. The First Day Motions were subsequently approved by the Bankruptcy Court on a final basis at hearings.
Chapter 11 Financing
In accordance with the terms of the RSA, the Company obtained the entry in the Chapter 11 Cases of an order of the Bankruptcy Court (in a form agreed with, among others, the agent under the senior secured credit facilities, lenders under the senior secured revolving credit facility and the senior secured term loans and holders of the first lien senior notes and the second lien senior notes) permitting the use of cash collateral to finance the Chapter 11 Cases. Such use is subject to an approved budget, updated and submitted every four weeks, consisting of rolling thirteen-week periods subject to the consent of the lenders under the senior secured revolving credit facility and the senior secured term loans.
Such order requires that the Company make cash adequate protection payments on the senior secured revolving credit facility and the senior secured term loans for, among other things, unpaid pre-petition and post-petition fees, unpaid pre-petition interest (at the specified contract rate) and post-petition interest (at a rate equal to (1) the adjusted London Inter-Bank Offered Rate ("LIBOR"), plus (2) the contract-specified applicable margin, and plus (3) an incremental 200 basis points), quarterly amortization payments on the senior secured term loans and reimbursement of certain costs. Such order further requires that we make cash adequate protection payments on the first lien senior notes and the second lien senior notes for, among other thing, unpaid pre-petition and post-petition interest (at the specified non-default interest rate) and reimbursement of certain costs.
However, all cash adequate protection payments are provisional in nature and are subject to recharacterization, or reallocation as payments of principal if such relief is granted by the Bankruptcy Court. The cash collateral order provides that it is without prejudice to (i) the rights of certain parties to request additional or alternative adequate protection from the Bankruptcy Court, (ii) the rights of lenders under the senior secured revolving credit facility and the senior secured term loans to seek a higher rate of interest and (iii) the rights of the holders of the first lien senior notes and the second lien senior notes to seek payment of a make-whole premium.
With respect to the incremental 200 basis points paid on the senior secured revolving credit facility and the senior secured term loans, noted above, the Company incurred $11.7 million of expense, of which $7.8 million was paid, during the three months ended December 25, 2020, which has provisionally been classified as interest expense in the consolidated statement of operations. The Company may pursue recharacterization of these interest payments to principal through Bankruptcy Court filings or through a plan of reorganization. There can be no assurance that the treatment of this or other cash adequate protection payments will not change during the pendency of the proceedings or in connection with the confirmation of a plan of reorganization by the Bankruptcy Court.
As of December 25, 2020, the outstanding borrowings under the senior secured revolving credit facility, the senior secured term loans, the first lien senior notes and the second lien senior notes were classified outside of liabilities subject to compromise ("LSTC") as the related debt instruments were expected to be reinstated upon emergence from bankruptcy in accordance with the RSA.
Bar Date
On December 31, 2020, the Bankruptcy Court entered an order approving a deadline of February 16, 2021 at 5:00 pm (Eastern Time) (the "General Bar Date") and April 12, 2021, at 5:00 p.m. (Eastern Time) (the “Governmental Bar Date”) (collectively, together the "Bar Dates") for filing claims against the Debtors relating to the period prior to the Petition Date for general claims and government claims, respectively. The preceding Bar Dates do not cover opioid claims (inclusive of voluntary injunction opioid claims). The Company's review of asserted claims is discussed further below in Chapter 11 Claims Process.
Injunctive Litigation Relief
The Bankruptcy Court entered orders approving a 270-day injunction against certain opioid and Acthar Gel-related litigation matters proceeding against the Debtors and also against certain covered non-Debtors on November 25, 2020 and December 4, 2020. Refer to Note 20 for further discussion.
Restructuring Support Agreement
On October 11, 2020, the Company and the other Debtors entered into a RSA with creditors holding approximately 84%, by aggregate principal amount, of the Company’s outstanding guaranteed unsecured senior notes and with a group of governmental plaintiffs in the opioid litigation pending against the Company and certain of its subsidiaries, including 50 state and territory attorneys general and the court-appointed plaintiffs’ executive committee in the opioid multidistrict litigation (collectively, the "Supporting Parties"). After the bankruptcy filing, the Multi-State Governmental Entities Group entered into a joinder to the RSA that gained the support of approximately 1,300 cities, municipalities, hospital and school districts, amongst others.
The RSA incorporates the terms agreed to by the parties reflected in the term sheets attached to the RSA, including an agreement by the Supporting Parties to support the following:
•A proposed resolution of all opioid-related claims against the Company and its subsidiaries. Under the terms of the amended proposed settlement (the "Amended Proposed Opioid-Related Litigation Settlement"), which would become effective upon Mallinckrodt’s emergence from the Chapter 11 process, subject to court approval and other conditions:
◦Opioid claims would be channeled to one or more trusts, which would receive $1,600.0 million in structured payments consisting of (i) a $450.0 million payment upon the Company’s emergence from Chapter 11; (ii) a $200.0 million payment upon each of the first and second anniversaries of emergence; and (iii) a $150.0 million payment upon each of the third through seventh anniversaries of emergence with a one-year prepayment option at a discount for all but the first payment.
◦Opioid claimants would also receive warrants for approximately 19.99% of the reorganized Company’s new outstanding shares, after giving effect to the exercise of the warrants, but subject to dilution from equity reserved under the management incentive plan, exercisable at any time on or prior to the seventh anniversary of the Company's emergence, at a strike price reflecting an aggregate equity value for the reorganized Debtors of $1,551.0 million (the "New Opioid Warrants").
◦Upon commencing the Chapter 11 filing, the Company will comply with an agreed-upon operating injunction with respect to the operation of its opioid business.
•A proposed resolution with the U.S. Department of Justice and other governmental parties to settle a range of litigation matters and disputes relating to Acthar Gel.
◦The Company has reached an agreement in principle with the U.S. Department of Justice ("DOJ") and other governmental parties to settle a range of litigation matters and disputes relating to Acthar Gel (the "Proposed Acthar Gel-Related Settlement") including the Medicaid lawsuit with the Centers for Medicare and Medicaid Services ("CMS"), a related False Claims Act ("FCA") lawsuit in Boston, and an Eastern District of Pennsylvania ("EDPA") FCA lawsuit relating to Acthar Gel's previous owner's (Questcor Pharmaceuticals Inc. ("Questcor")) interactions with an independent charitable foundation. Under the Proposed Acthar Gel-Related Settlement, which was conditioned upon the Company entering the Chapter 11 restructuring process, the Company has agreed to pay $260.0 million to the DOJ and other parties over seven years and reset Acthar Gel’s Medicaid rebate calculation as of July 1, 2020, such that state Medicaid programs will receive 100% rebates on Acthar Gel Medicaid sales, based on current Acthar Gel pricing. Additionally, upon execution of the settlement, the Company will dismiss its appeal of the U.S. District Court of Columbia's ("D.C. District Court") adverse decision in the Medicaid lawsuit, which appeal was filed in the U.S. Court of Appeals for the District of Columbia ("D.C. Circuit"). In turn, the U.S. Government will drop its demand for approximately $640 million in retrospective Medicaid rebates for Acthar Gel and agree to dismiss the FCA lawsuit in Boston and the EDPA FCA lawsuit.
Mallinckrodt has entered into the Proposed Acthar Gel-Related Settlement to settle with the DOJ and other governmental parties solely to move past these litigation matters and disputes and will make no admission of liability. The Company is working to complete the settlement with the DOJ, as well as various states that are party to the Boston FCA litigation, over the next several months, subject to court approval.
•The reinstatement of the agreements associated with the Company’s senior secured term loans, senior secured revolving credit facility, 10.00% first and second lien senior notes. At the end of the court-supervised process, all allowed claims under these agreements would be reinstated at existing rates and maturities.
•A restructuring of the Company’s unsecured notes under the Guaranteed Unsecured Notes Indentures. At the end of the court-supervised process, holders of allowed claims under indentures governing the Guaranteed Unsecured Notes (the 5.75% Senior Notes due 2022, the 5.625% Senior Notes due 2023 and the 5.50% Senior Notes due 2025,) and the Guaranteed Unsecured Notes are expected to receive their pro rata share of $375.0 million of new 10.00% second lien senior secured notes due seven years after emergence and 100% of the new Mallinckrodt ordinary shares, subject to dilution by the warrants described above and certain other equity.
•A proposed resolution of other remaining claims and treatment of equity holders. At the end of the court-supervised process, trade creditors and holders of allowed general unsecured claims are expected to share in $150.0 million in cash, and equity holders and holders of the 9.50% debentures due May 2022, the 8.00% debentures due March 2023 and the 4.75% senior notes due April 2023 would receive no recovery.
The restructuring transactions contemplated by the RSA will be effectuated through a plan of reorganization to be proposed by the Debtors (the "Plan"), which among other things as outlined above, provides for a financial restructuring that would reduce the Company’s total debt by approximately $1,300.0 million. Pursuant to the RSA, each of the Debtors and the Supporting Parties has made certain customary commitments to each other in connection with the pursuit of the transactions contemplated by the term sheets attached thereto. The Debtors have agreed, among other things, to use commercially reasonable efforts to make all requisite filings with the Bankruptcy Court; continue to involve and update the Supporting Parties’ representatives in the bankruptcy process; and satisfy certain other covenants. The Supporting Parties have committed to support and vote for the Plan and have agreed to use commercially reasonable efforts to take, or refrain from taking, certain actions in furtherance of such support.
The RSA contains milestones for the progress of the Chapter 11 Cases (the "Milestones"), which include the dates by which the Debtors are required to, among other things, obtain certain orders of the Bankruptcy Court and consummate the Debtors’ emergence from bankruptcy. Among other milestones, the RSA (as expected to be amended by the Joinder and Amendment (as defined in Note 24)) will require the Debtors to file a Plan by no later than March 31, 2021, the Bankruptcy Court to have entered an order confirming the Plan by no later than August 15, 2021 and the Debtors to have emerged from bankruptcy by no later than November 15, 2021.
Each of the parties to the RSA may terminate the agreement (and thereby their support for the Plan) under certain limited circumstances. Any Debtor may terminate the RSA upon, among other circumstances: (i) its board of directors, after consultation with legal counsel, reasonably determining in good faith that performance under the RSA would be inconsistent with its fiduciary duties; and (ii) certain actions by the Bankruptcy Court, including dismissing the Chapter 11 Cases or converting the Chapter 11 Cases into cases under Chapter 7 of the Bankruptcy Code.
The Supporting Parties also have specified termination rights, including, among other circumstances, termination rights that arise if certain of the Milestones have not been achieved, extended, or waived. Termination by one of these creditor groups will result in the termination of the RSA as to the terminating group only, with the RSA remaining in effect with respect to the Debtors and the non-terminating group.
The transactions contemplated by the RSA are subject to approval by the Bankruptcy Court, among other conditions. Accordingly, no assurance can be given that the transactions described therein will be consummated.
On March 10, 2021, the Company announced that the Debtors have agreed to a joinder and amendment to the RSA whereby an ad hoc group of lenders holding approximately $1,300.0 million by aggregate principal amount, of the Company’s outstanding 2017 Term Loan (as defined in Note 15) and the Company’s outstanding 2018 Term Loan (as defined in Note 15) have agreed to join the RSA as supporting parties and certain of the existing supporting parties have agreed to certain amendments thereto. See further discussion in Note 24.
Event of default
The commencement of the Chapter 11 Cases above constituted an event of default under certain of the Company’s debt agreements. Subject to any applicable provisions of the Bankruptcy Code, the Company’s debt instruments and agreements described in Note 15 provide that, as a result of the commencement of the Chapter 11 Cases, the principal amount, together with accrued and unpaid interest thereon, and in the case of the indebtedness outstanding under the senior notes, premium, if any, thereon, shall be immediately due and payable. Accordingly, all long-term debt was classified as current on the consolidated balance sheet as of December 25, 2020. However, any efforts to enforce payment obligations under the debt instruments are automatically stayed as a result of the Chapter 11 Cases and the creditors’ rights in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code.
Financial Reporting in Reorganization
Effective on the Petition Date, the Company began to apply Financial Accounting Standards Board Accounting Standards Codification ("ASC") Topic 852 - Reorganizations, which specifies the accounting and financial reporting requirements for entities
reorganizing through Chapter 11 bankruptcy proceedings. These requirements include distinguishing transactions directly associated with the reorganization from activities related to the ongoing operations of the business within the financial statements for periods subsequent to the Petition Date. Expenses, realized gains and losses, and provisions for losses that are directly associated with reorganization proceedings must be reported separately as reorganization items, net in the consolidated statements of operations. In addition, the consolidated balance sheet must distinguish pre-petition LSTC of the Debtors from pre-petition liabilities that are not subject to compromise, post-petition liabilities, and liabilities of the subsidiaries of the Company that are not debtors in the Chapter 11 Cases. LSTC are pre-petition obligations that are not fully secured and have at least a possibility of not being repaid at the full claim amount. Where there is uncertainty about whether a secured claim will be paid or impaired pursuant to the Chapter 11 Cases, the Debtors have classified the entire amount of the claim as LSTC.
Furthermore, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession, actions to enforce or otherwise effect the payment of certain claims against the Debtors in existence before the Petition Date are stayed while the Debtors continue business operations as debtors-in-possession. These claims are reflected as LSTC in the consolidated balance sheet at December 25, 2020. Additional claims (which could be LSTC) may arise after the Petition Date resulting from the rejection of executory contracts, including leases, and from the determination by the Bankruptcy Court (or agreement by parties-in-interest) of allowed claims for contingencies and other disputed amounts.
Certain subsidiary entities are not debtors under the Chapter 11 Cases. However, condensed combined financial statements of the Debtors are not presented in the notes to the consolidated financial statements as the assets and liabilities, operating results and cash flows of the non-debtor entities included in the consolidated financial statements are insignificant and, therefore, the consolidated financial statements presented herein materially represent the condensed combined financial statements of the debtor entities for all periods presented. As of December 25, 2020, the non-debtor entities have intercompany receivables and intercompany payables from/to the debtor entities of $282.3 million and $120.3 million, respectively, which are primarily attributable to the Company's centralized approach to cash management and financing of its operations. The permission to continue the use of existing cash management systems during the pendency of the Chapter 11 Cases was approved by the Bankruptcy Court on a final basis as part of the First Day motions as described further above.
The Company is currently assessing whether or not it qualifies for fresh start accounting upon emergence from Chapter 11. If the Company were to meet the requirements to adopt the fresh start accounting rules, its assets and liabilities would be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on its consolidated balance sheet as of December 25, 2020.
Notice of Delisting
On October 13, 2020, New York Stock Exchange ("NYSE") Regulation Inc. filed a Form 25 with the SEC to remove the Company's ordinary shares from listing and registration on the NYSE. The delisting became effective October 26, 2020. The deregistration of the ordinary shares under Section 12(b) of the Securities Exchange Act of 1934 ("Exchange Act") became effective on January 11, 2021, at which point the ordinary shares were deemed registered under Section 12(g) of the Exchange Act. The Company's ordinary shares began trading on the OTC Pink Marketplace on October 13, 2020 under the symbol “MNKKQ.”
Liabilities Subject to Compromise
As a result of the commencement of the Chapter 11 Cases, the payment of pre-petition liabilities is subject to compromise or other treatment pursuant to a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-petition liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors the authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors' business and assets. As described above, among other things, the Bankruptcy Court authorized, but did not require, the Debtors to pay certain pre-petition claims relating to employee wages and benefits, critical and foreign vendors and customer programs.
The determination of how liabilities will ultimately be settled or treated cannot be made until the Bankruptcy Court confirms a Chapter 11 plan of reorganization and such plan becomes effective. Accordingly, the ultimate amount of such liabilities is not determinable at this time. GAAP requires pre-petition liabilities that are subject to compromise to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts currently classified as LSTC are preliminary and may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, rejection of executory contracts, continued reconciliation or other events.
Liabilities subject to compromise as of December 25, 2020 consisted of the following:
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December 25,
2020
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Accounts payable
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$
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61.9
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Accrued interest
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35.2
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Debt
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1,660.7
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Medicaid lawsuit
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638.9
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Opioid-related litigation settlement liability
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1,600.0
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Other current and non-current liabilities
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163.5
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Pension and postretirement benefits
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32.4
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Total liabilities subject to compromise
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$
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4,192.6
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Contractual interest
While the Chapter 11 Cases are pending, the Company is not accruing interest on its unsecured debt instruments as of the Petition Date on a go-forward basis, as the Debtors do not anticipate making interest payments due under their respective unsecured debt instruments; however, the Debtors expect to pay all interest payments in full as they come due under their respective senior secured debt instruments. The total aggregate amount of interest paid pursuant to the Company's unsecured debt instruments was $64.2 million and $147.3 million during fiscal 2020 and 2019, respectively. The total aggregate amount of interest payments due under the Company's unsecured debt instruments from the Petition Date through December 25, 2020, which it did not pay is $28.8 million.
Chapter 11 Claims Process
The Debtors have received over 30,000 proofs of claim since the Petition Date. The Debtors continue their review and analysis of certain claims including litigation claims, trade creditor claims, non-qualified benefit plan claims, customer deposits and advances, along with other tax and regulatory claims, and therefore, the ultimate liability of the Debtors for such claims may differ from the amount recorded in LSTC. To the extent that the Debtors believe that such claims will be allowed by the Bankruptcy Court, the Debtors will continue to record the expected allowed amounts of such claims as LSTC. The determination of the expected allowed amount of a claim is based on many factors, including whether the Debtors are party to a settlement agreement with applicable claimholders or their representatives, and is not necessarily limited to information available to the Debtors. Claims covered by a settlement agreement include the Proposed Acthar Gel-Related Settlement and Amended Opioid-Related Litigation Settlement (collectively, the "Proposed Settlements"). See Restructuring Support Agreement section within this note for more information on settlement of these claims. As the Debtors continue to resolve claims, differences between those final allowed claims and the liabilities recorded in the consolidated balance sheet will be recognized as reorganization items, net in the Company's consolidated statements of operations as they are resolved. The determination of how liabilities will ultimately be resolved cannot be made until the Bankruptcy Court approves a plan of reorganization or approves orders related to settlement of specific liabilities. Accordingly, the ultimate amount or resolution of such liabilities is not determinable at this time. The resolution of such claims could result in substantial adjustments to the Company's financial statements.
Reorganization items, net
Reorganization items, net, represent amounts incurred after the Petition Date as a direct result of the Chapter 11 Cases and are comprised of bankruptcy-related professional fees and adjustments to reflect the carrying value of LSTC at their estimated allowed claim amounts, as such adjustments are approved by the Bankruptcy Court. Cash paid for reorganization items, net for fiscal 2020 was $8.7 million. Reorganization items, net from the Petition Date through December 25, 2020 include the following:
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December 25,
2020
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Professional fees
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$
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51.1
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Debt valuation adjustments
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10.2
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Adjustments of other claims
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0.1
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Total reorganization items, net
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$
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61.4
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3.
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Summary of Significant Accounting Policies
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Liabilities Subject to Compromise
As a result of the commencement of the Chapter 11 Cases, the payment of pre-petition liabilities is subject to compromise or other treatment pursuant to a plan of reorganization. The determination of how liabilities will ultimately be settled or treated cannot be made until the Bankruptcy Court confirms a Chapter 11 plan of reorganization and such plan becomes effective. Accordingly, the ultimate amount of such liabilities is not determinable at this time. Pre-petition liabilities that are subject to compromise are to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts currently classified as LSTC are preliminary and may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, rejection of executory contracts, continued reconciliation or other events.
Revenue Recognition
Product Sales Revenue
The Company sells its products through independent channels, including direct to retail pharmacies, end user customers and through distributors who resell the products to retail pharmacies, institutions and end user customers, while certain products are sold and distributed to hospitals. The Company also enters into arrangements with indirect customers, such as health care providers and payers, wholesalers, government agencies, institutions, managed care organizations and group purchasing organizations to establish contract pricing for certain products that provide for government-mandated and/or privately-negotiated rebates, sales incentives, chargebacks, distribution service agreements fees, fees for services and administration fees and discounts with respect to the purchase of the Company's products.
Reserve for Variable Considerations
Product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. These reserves result from estimated chargebacks, rebates, product returns and other sales deductions that are offered within contracts between the Company and its customers, health care providers and payers relating to the sale of the Company's products. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as the Company's historical experience, estimated future trends, estimated customer inventory levels, current contracted sales terms with customers, level of utilization of the Company's products and other competitive factors. Overall, these reserves reflect the Company's best estimate of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained (reduced) and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The Company adjusts reserves for chargebacks, rebates, product returns and other sales deductions to reflect differences between estimated and actual experience. Such adjustments impact the amount of net sales recognized in the period of adjustment.
Product sales are recognized when the customer obtains control of the Company's product. Control is transferred either at a point in time, generally upon delivery to the customer site, or in the case of certain of the Company's products, over the period in which the customer has access to the product and related services. Revenue recognized over time is based upon either consumption of the product or passage of time based upon the Company's determination of the measure that best aligns with how the obligation is satisfied. The Company's considerations of why such measures provide a faithful depiction of the transfer of its products are as follows:
•For those contracts whereby revenue is recognized over time based upon consumption of the product, the Company either has:
1.the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company's performance to date, for which the practical expedient to recognize in proportion to the amount it has the right to invoice has been applied, or
2.the remaining goods and services to which the customer is entitled is diminished upon consumption.
•For those contracts whereby revenue is recognized over time based upon the passage of time, the benefit that the customer receives from unlimited access to the Company's product does not vary, regardless of consumption. As a result, the Company's obligation diminishes with the passage of time; therefore, ratable recognition of the transaction price over the contract period is the measure that best aligns with how the obligation is satisfied.
Transaction price allocated to the remaining performance obligations
The majority of the Company's contracts have a term of less than one year; therefore, the related disclosure of the amount of transaction price allocated to the performance obligations that are unsatisfied at period end has been omitted.
Cost to obtain a contract
As the majority of the Company's contracts are short-term in nature, sales commissions are generally expensed when incurred as the amortization period would have been less than one year. These costs are recorded within selling, general and administrative expense ("SG&A") in the consolidated statements of operations. For contracts that extend beyond one year, the incremental expense recognition matches the recognition of related revenue.
Costs to fulfill a contract
The Company capitalizes the costs associated with the devices used in the Company's portfolio of drug-device combination products, which are used in satisfaction of future performance obligations. Capital expenditures for these devices represent cash outflows for the Company's cost to produce the asset, which is classified in property, plant and equipment, net on the consolidated balance sheets and expensed to cost of sales over the useful life of the equipment.
Product Royalty Revenues
The Company licenses certain rights to Amitiza® (lubiprostone) ("Amitiza") to a third party in exchange for royalties on net sales of the product. The Company recognizes such royalty revenue as the related sales occur.
Contract Balances
Accounts receivable are recorded when the right to consideration becomes unconditional. Payments received from customers are typically based upon payment terms of 30 days. The Company does not maintain contract asset balances aside from the accounts receivable balance as presented on the consolidated balance sheets as costs to obtain a contract are expensed when incurred as the amortization period would have been less than one year. These costs are recorded within SG&A on the consolidated statements of operations. Contract liabilities are recorded when cash payments are received in advance of the Company's performance, including amounts which are refundable.
Taxes collected from customers relating to product sales and remitted to governmental authorities are accounted for on a net basis. Accordingly, such taxes are excluded from both net sales and expenses.
Shipping and Handling Costs
Shipping costs, which are costs incurred to physically move product from the Company's premises to the customer's premises, are classified as SG&A. Handling costs, which are costs incurred to store, move and prepare product for shipment, are classified as cost of sales. Shipping costs included in SG&A expenses in continuing operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Shipping costs
|
$
|
20.1
|
|
|
$
|
17.6
|
|
|
$
|
12.8
|
|
Research and Development
Internal research and development costs are expensed as incurred. Research and development ("R&D") expenses include salary and benefits, allocated overhead and occupancy costs, clinical trial and related clinical manufacturing costs, contract services, medical affairs and other costs.
From time to time, the Company has entered into licensing or collaborative agreements with third parties to develop a new drug candidate or intellectual property asset. These agreements may include R&D, marketing, promotion and selling activities to be performed by one or all parties involved. These collaborations generally include upfront, milestone and royalty or profit sharing payments contingent upon future events tied to the developmental and commercial success of the asset. In general, upfront and milestone payments made to third parties under these agreements are expensed as incurred up to the point of regulatory approval of the product. Milestone payments made to third parties upon regulatory approval are capitalized as an intangible asset and amortized to cost of sales over the estimated useful life of the related product.
Currency Translation
For the Company's non-U.S. subsidiaries that transact in a functional currency other than U.S. dollars, assets and liabilities are translated into U.S. dollars using fiscal year-end exchange rates. Revenues and expenses are translated at the average exchange rates in effect during the related month. The net effect of these translation adjustments is shown in the consolidated financial statements as a
component of accumulated other comprehensive loss ("AOCI"). From time to time, the Company has entered into derivative instruments to mitigate the exposure of movements in certain of these foreign currency transactions. Gains and losses resulting from foreign currency transactions are included in net loss.
Cash and Cash Equivalents
The Company classifies cash on hand and deposits in banks, including commercial paper, money market accounts and other investments it may hold from time to time, with an original maturity to the Company of three months or less, as cash and cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts reflects an estimate of losses inherent in the Company's accounts receivable portfolio determined on the basis of historical experience, current facts and circumstances, reasonable and supportable forecasts and other available evidence. Accounts receivable are written off when management determines they are uncollectible. Trade accounts receivable are also presented net of reserves related to chargebacks and rebates payable to customers with whom the Company has trade accounts receivable and the right of offset exists.
Inventories
Inventories are recorded at the lower of cost or net realizable value, primarily using the first-in, first-out convention. The Company reduces the carrying value of inventories for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation. Major renewals and improvements are capitalized, while routine maintenance and repairs are expensed as incurred. Depreciation for property, plant and equipment, other than land and construction in process, is generally based upon the following estimated useful lives, using the straight-line method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
10
|
to
|
45 years
|
|
Leasehold improvements
|
1
|
to
|
20 years
|
|
Capitalized software
|
1
|
to
|
10 years
|
|
Machinery and equipment
|
1
|
to
|
20 years
|
The Company capitalizes certain computer software and development costs incurred in connection with developing or obtaining software for internal use.
Upon retirement or other disposal of property, plant and equipment, the cost and related amount of accumulated depreciation are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds is included in net loss.
The Company assesses the recoverability of assets or asset groups using undiscounted cash flows whenever events or circumstances indicate that the carrying value of an asset or asset group may not be recoverable. If an asset or asset group is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value of the asset or asset group and its fair value.
Leases
The Company assesses all contracts at inception to determine whether a lease exists. The Company leases office space, manufacturing and warehousing facilities, equipment and vehicles, which are generally operating leases. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately. The Company's lease agreements generally do not contain variable lease payments or any material residual value guarantees.
Lease assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term as of the commencement date. As the Company's leases do not generally provide an implicit rate, the Company utilized its incremental borrowing rate based on the information available at commencement date in determining the present value of future lease payments. The Company used the incremental borrowing rate as of December 29, 2018 for leases that commenced prior to that date. Most leases
include one or more options to terminate or renew, with renewal terms that can extend the lease term from one to five years. The exercise of lease renewal options is at the Company's sole discretion. Termination and renewal options are included within the lease assets and liabilities only to the extent they are reasonably certain. Refer to Note 4 for further information regarding the adoption of the lease accounting standard in fiscal 2019.
Acquisitions
Amounts paid for acquisitions that meet the criteria for business combination accounting are allocated to the tangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The Company then allocates the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including purchased R&D. The fair value of identifiable intangible assets is based on detailed valuations. The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill.
The Company's purchased R&D represents the estimated fair value as of the acquisition date of in-process projects that have not reached technological feasibility. The primary basis for determining technological feasibility of these projects is obtaining regulatory approval.
The fair value of in-process research and development ("IPR&D") is determined using the discounted cash flow method. In determining the fair value of IPR&D, the Company considers, among other factors, appraisals, the stage of completion of the projects, the technological feasibility of the projects, whether the projects have an alternative future use and the estimated residual cash flows that could be generated from the various projects and technologies over their respective projected economic lives. The discount rate used includes a rate of return that accounts for the time value of money, as well as risk factors that reflect the economic risk that the cash flows projected may not be realized.
The fair value attributable to IPR&D projects at the time of acquisition is capitalized as an indefinite-lived intangible asset and tested annually for impairment until the project is completed or abandoned. Upon completion of the project, the indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the indefinite-lived intangible asset is charged to expense.
Certain asset acquisitions or license agreements may not meet the criteria for a business combination. The Company accounts for these transactions as asset acquisitions and recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. Any initial up-front payments incurred in connection with the acquisition or licensing of IPR&D product candidates that do not meet the definition of a business are treated as R&D expense.
Goodwill and Other Intangible Assets
During fiscal 2018, the Company's annual goodwill impairment analysis resulted in the recognition of a full goodwill impairment of $3,672.8 million related to the Specialty Brands reporting unit. As a result, the Company did not have a goodwill balance during fiscal 2020 and 2019. Prior to this full impairment, the Company tested goodwill on the first day of the fourth quarter of each year for impairment or whenever events or changes in circumstances indicated that the carrying value may not be recoverable. Goodwill represents the excess of the purchase price of an acquired entity over the amounts assigned to assets and liabilities assumed in a business combination. The Company tests goodwill for impairment on the first day of the fourth quarter of each fiscal year, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The impairment test is comprised of comparing the carrying value of a reporting unit to its estimated fair value. The Company estimates the fair value of a reporting unit through internal analyses and valuation, utilizing an income approach (a level three measurement technique) based on the present value of future cash flows. The fair value of the Company's reporting units is reconciled to its share price and market capitalization as a corroborative step. If the carrying value of a reporting unit exceeds its fair value, the Company will recognize the excess of the carrying value over the fair value as a goodwill impairment loss.
Intangible assets acquired in a business combination are recorded at fair value, while intangible assets acquired in other transactions are recorded at cost. Intangible assets with finite useful lives are subsequently amortized, generally using the straight-line method, over the estimated useful lives of the assets. The estimated useful lives of the Company's intangible assets as of December 25, 2020 were the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completed technology
|
9
|
to
|
25 years
|
|
License agreements
|
|
|
30 years
|
|
Trademarks
|
22
|
to
|
30 years
|
Amortization expense related to completed technology and certain other intangible assets is included in cost of sales, while amortization expense related to intangible assets that contribute to the Company's ability to sell, market and distribute products is included in SG&A.
When a triggering event occurs, the Company evaluates potential impairment of finite-lived intangible assets by first comparing undiscounted cash flows associated with the asset, or the asset group they are part of, to its carrying value. If the carrying value is greater than the undiscounted cash flows, the amount of potential impairment is measured by comparing the fair value of the assets, or asset group, with their carrying value. The fair value of the intangible asset, or asset group, is estimated using an income approach. If the fair value is less than the carrying value of the intangible asset, or asset group, the amount recognized for impairment is equal to the difference between the carrying value of the asset and the fair value of the asset. The Company assesses the remaining useful life and the recoverability of finite-lived intangible assets whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. The Company annually tests the indefinite-lived intangible assets for impairment, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable by either a qualitative or income approach. The Company will compare the fair value of the assets with their carrying value and record an impairment when the carrying value exceeds the fair value.
Contingencies
The Company is subject to various patent infringement claims, product liability matters, government investigations, environmental matters, employee disputes, contractual disputes and other commercial disputes, and other legal proceedings in the ordinary course of business as further discussed in Note 20. The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. The Company discounts environmental liabilities using a risk-free rate of return when the obligation is fixed or reasonably determinable. The impact of the discount in the consolidated balance sheets was not material in any period presented. Legal fees, other than those pertaining to environmental and asbestos matters, are expensed as incurred. Insurance recoveries related to potential claims are recognized up to the amount of the recorded liability when coverage is confirmed and the estimated recoveries are probable of payment. Assets and liabilities are not netted for financial statement presentation.
Share-Based Compensation
The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. That cost is recognized over the period during which an employee is required to provide service in exchange for the award, the requisite service period (generally the vesting period).
Restructuring
The Company recognizes charges associated with the Company's Board of Directors approved restructuring programs designed to transform its business and improve its cost structure. Restructuring charges can include severance costs, infrastructure charges, distributor contract cancellations and other items. The Company accrues for costs when they are probable and reasonably estimable.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the consolidated financial statements. Deferred tax assets and liabilities are determined based on the differences between the book and tax bases of assets and liabilities and operating loss carryforwards, using tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to reduce net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company determines whether it is more likely than not that a tax position will be sustained upon examination. The tax benefit of any tax position that meets the more-likely-than-not recognition threshold is calculated as the largest amount that is more than 50.0% likely of being realized upon resolution of the uncertainty. To the extent a full benefit is not expected to be realized on the uncertain tax position, an income tax liability, or a reduction to a deferred tax asset is established. Interest and penalties on income tax obligations, associated with uncertain tax positions, are included in the provision for income taxes.
The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across the Company's global operations. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from current estimates of the tax liabilities. If the Company's estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities may result in income tax benefits being recognized in the period when it is determined that the liabilities are no longer necessary. Refer to Note 9 for further information regarding the classification of such amounts in the consolidated balance sheets.
|
|
|
|
|
|
|
|
4.
|
Recently Issued Accounting Standards
|
Adopted
The Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," in February 2018. This ASU allows for a reclassification from AOCI to retained earnings for the stranded tax effects arising from the change in the reduction of the U.S. federal statutory income tax rate from 35.0% to 21.0%. The Company adopted this standard as of day 1 of fiscal 2019, which resulted in a reclassification between AOCI and retained deficit of $0.5 million and had no impact on the Company's results of operations or financial position.
The FASB issued ASU 2016-02, "Leases," in February 2016. This ASU was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset. The FASB subsequently issued additional ASUs to clarify the guidance of ASU 2016-02 ("Topic 842"), as amended. The Company adopted this standard as of day 1 of fiscal 2019 utilizing the modified transition approach expedient which allows an entity to elect not to recast its comparative periods in the period of adoption. In addition, the Company elected to use the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company also elected the hindsight practical expedient to determine the lease term for existing leases. Adoption of the new standard resulted in the recording of additional lease assets and corresponding liabilities of $83.1 million and $99.7 million, respectively, as of December 29, 2018. Refer to Note 13 for further details on the Company's leases.
The FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," in January 2016. This update addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Under the new guidance, equity investments, other than equity method investments, are to be measured at fair value with changes in fair value recognized through net income. The Company adopted this standard in fiscal 2018, resulting in a $1.5 million increase to beginning retained earnings with an offsetting decrease to AOCI relating to the unrealized gain on its investment in Mesoblast Limited ("Mesoblast"). The adoption of this standard did not result in any material changes to the consolidated financial statements.
|
|
|
|
|
|
|
|
5.
|
Revenue from Contracts with Customers
|
Product Sales Revenue
See Note 22 for presentation of the Company's net sales by product family.
Reserves for variable consideration
On November 16, 2020, the Debtors received final approval from the Bankruptcy Court to continue customer programs during the pendency of the Chapter 11 Cases. The following table reflects activity in the Company's sales reserve accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rebates and Chargebacks
|
|
Product Returns
|
|
Other Sales Deductions
|
|
Total
|
|
Balance as of December 29, 2017
|
$
|
327.4
|
|
|
$
|
34.5
|
|
|
$
|
14.7
|
|
|
$
|
376.6
|
|
|
Provisions
|
2,281.3
|
|
|
39.3
|
|
|
66.9
|
|
|
2,387.5
|
|
|
Payments or credits
|
(2,254.4)
|
|
|
(39.8)
|
|
|
(64.5)
|
|
|
(2,358.7)
|
|
|
Balance as of December 28, 2018
|
354.3
|
|
|
34.0
|
|
|
17.1
|
|
|
405.4
|
|
|
Provisions
|
2,347.3
|
|
|
22.2
|
|
|
68.2
|
|
|
2,437.7
|
|
|
Payments or credits
|
(2,405.8)
|
|
|
(27.8)
|
|
|
(72.1)
|
|
|
(2,505.7)
|
|
|
Balance as of December 27, 2019
|
295.8
|
|
|
28.4
|
|
|
13.2
|
|
|
337.4
|
|
|
Provisions
|
2,065.9
|
|
|
28.9
|
|
|
59.5
|
|
|
2,154.3
|
|
|
Provision for Medicaid lawsuit (Note 20) (1)
|
536.0
|
|
|
—
|
|
|
—
|
|
|
536.0
|
|
|
Payments or credits
|
(2,701.2)
|
|
|
(30.7)
|
|
|
(60.4)
|
|
|
(2,792.3)
|
|
|
Balance as of December 25, 2020 (1)
|
$
|
196.5
|
|
|
$
|
26.6
|
|
|
$
|
12.3
|
|
|
$
|
235.4
|
|
(1)Excludes the $105.1 million that is reflected as a component of operating expenses as it represents a pre-acquisition contingency related to the portion of the liability that arose from sales of Acthar Gel prior to the Company’s acquisition of Questcor in August 2014. See Note 20 for further detail on the status of the Medicaid lawsuit.
Product sales transferred to customers at a point in time and over time were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Product sales transferred at a point in time
|
78.9
|
%
|
|
81.8
|
%
|
|
82.9
|
%
|
|
Product sales transferred over time
|
21.1
|
|
|
18.2
|
|
|
17.1
|
|
Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue from contracts extending greater than one year for certain of the Company's hospital products that are expected to be recognized in the future related to performance obligations that were unsatisfied or partially unsatisfied as of December 25, 2020:
|
|
|
|
|
|
|
|
Fiscal 2021
|
$
|
125.2
|
|
|
Fiscal 2022
|
62.3
|
|
|
Fiscal 2023
|
28.0
|
|
|
Thereafter
|
0.6
|
|
Costs to fulfill a contract
As of December 25, 2020 and December 27, 2019, the total net book value of the devices used in the Company's portfolio of drug-device combination products, which are used in satisfying future performance obligations, was $25.8 million and $26.5 million, respectively, and was classified in property, plant and equipment, net, on the consolidated balance sheets. The associated depreciation expense recognized during fiscal 2020 and 2019 was $5.5 million and $6.7 million, respectively.
Product Royalty Revenues
As part of the Company's acquisition of Sucampo Pharmaceuticals, Inc. ("Sucampo") in fiscal 2018, as discussed in further detail in Note 7, it acquired an arrangement under which the Company licenses certain rights to Amitiza to a third party in exchange for royalties on net sales of the product. The Company recognizes such royalty revenue as the related sales occur. The royalty rates consist of several tiers ranging from 18.0% to 26.0% with the royalty rate resetting every year. The associated royalty revenue recognized during fiscal 2020, 2019 and 2018 was $70.3 million, $81.3 million and $81.3 million, respectively.
Contract Liabilities
The following table reflects the balance of the Company's contract liabilities at the end of the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25,
2020
|
|
December 27,
2019
|
|
Accrued and other current liabilities
|
$
|
2.7
|
|
|
$
|
5.6
|
|
|
Other liabilities
|
0.4
|
|
|
0.6
|
|
|
Contract liabilities
|
$
|
3.1
|
|
|
$
|
6.2
|
|
Revenue recognized during fiscal 2020 and 2019 from amounts included in contract liabilities at the beginning of the period was approximately $5.1 million and $13.7 million, inclusive of the Company's wholly owned subsidiary BioVectra Inc. ("BioVectra), prior to the completion of the sale of this business in November 2019.
|
|
|
|
|
|
|
|
6.
|
Discontinued Operations and Divestitures
|
Discontinued Operations
Nuclear Imaging: The Company received a total of $9.0 million, $9.0 million and $15.0 million in contingent consideration in fiscal 2020, 2019 and 2018, respectively, related to the 2017 sale of the Nuclear Imaging business, consisting primarily of the issuance of $9.0 million par value non-voting preferred equity certificates in fiscal 2020, 2019 and 2018, with an additional $6.0 million cash payment in fiscal 2018. The preferred equity certificates accrued interest at a rate of 10.0% per annum and were redeemable on the retirement date of July 27, 2025, or earlier if elected by the issuer, for cash at a price equal to the par value and any accrued but unpaid interest. Interest was able to be paid on an annual basis in additional preferred equity certificates. The receipt of the preferred equity certificates are presented as a non-cash investing activity on the consolidated statements of cash flows for fiscal 2020, 2019 and 2018. On December 4, 2020, the issuer elected to redeem 100% of the outstanding preferred equity certificates, and the Company received a
cash payment of $32.5 million, which included $29.8 million for the outstanding preferred equity certificates and $2.7 million for accrued interest receivable through the redemption date. In addition, during fiscal 2020, a tax benefit of $18.1 million, comprised of tax and interest on unrecognized tax benefits related to the Nuclear Imaging business, was recognized due to a lapse of statute of limitations.
Divestitures
The below businesses did not meet the criteria for discontinued operations classification and accordingly were included in continuing operations for all periods presented.
BioVectra: In November 2019, the Company completed the sale of its wholly owned subsidiary BioVectra to an affiliate of H.I.G. Capital for total consideration of up to $250.0 million, including an upfront payment of $135.0 million and contingent consideration of $115.0 million based on long-term performance of the business. During fiscal 2019, the Company recorded a loss on the sale of $33.5 million, which excluded any potential proceeds from future milestones, in the event they are achieved.
PreveLeak/Recothrom: In March 2018, the Company completed the sale of a portion of its Hemostasis business, inclusive of its PreveLeak™ Surgical Sealant ("PreveLeak") and RECOTHROM® Thrombin topical (Recombinant) ("Recothrom") products to Baxter International Inc. ("Baxter") for approximately $185.0 million, with a base payment of $153.0 million, inclusive of existing inventory and subject to a closing inventory adjustment, with the remainder in potential future milestones. Baxter assumed other expenses, including contingent liabilities associated with PreveLeak. During fiscal 2018, the Company recorded a loss on the sale of $0.8 million, which excluded any potential proceeds from future milestones, in the event they are achieved and reflected a post-sale closing inventory adjustment of $13.7 million. During fiscal 2020, the Company recorded a $16.5 million gain on divestiture related to certain commercial milestones for the Recothrom product.
As part of the divestiture and calculation of the loss, the Company wrote off intangible assets of $49.9 million and goodwill of $51.5 million during fiscal 2018, from the Specialty Brands segment, ascribed to the PreveLeak and Recothrom operations. The remaining items included in the calculation of the loss are primarily attributable to inventory transferred, contingent consideration transferred and transaction costs incurred by the Company.
|
|
|
|
|
|
|
|
7.
|
Acquisitions and License Agreements
|
Business Acquisitions
Sucampo Pharmaceuticals, Inc.
In February 2018, the Company acquired Sucampo through the acquisition of all the outstanding common stock of Sucampo. Consideration for the transaction consisted of approximately $1.2 billion, including the assumption of Sucampo's third-party debt ("the Sucampo Acquisition"). The acquisition was funded through the issuance of a $600.0 million aggregate principal amount of senior secured term loan, a $900.0 million borrowing under the Company's revolving credit facility, as discussed further in Note 15, and cash on hand. Sucampo's primary commercialized product was Amitiza, a leading global product in the branded constipation market. Through this acquisition, the Company acquired VTS-270, a Phase 3 development product for Niemann-Pick Type C, a complicated, ultra-rare neurodegenerative disease that typically presents in childhood and is ultimately fatal. Also acquired was an option to exercise a collaborative agreement with Cancer Prevention Pharmaceuticals ("CPP") associated with the development of CPP-1X/sulindac, a Phase 3 development product for Familial Adenomatous Polyposis.
Upon completion of the Sucampo Acquisition, Sucampo's 3.25% convertible senior notes due 2021 ("the Sucampo Notes") became eligible to receive increased consideration in conjunction with a make-whole fundamental change, such that each $1,000 principal face amount of Sucampo Notes could be converted into $1,221 cash. The issued convertible debt of $300.0 million had been converted and paid in full by the Company during fiscal 2018.
Fair Value Allocation
The following amounts represent the allocation of the fair value of the identifiable assets acquired and liabilities assumed for the Sucampo acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
149.6
|
|
|
|
Accounts receivable
|
35.7
|
|
|
|
Inventory
|
153.2
|
|
|
|
Intangible assets (1)
|
919.5
|
|
|
|
Goodwill (non-tax deductible) (2)
|
248.6
|
|
|
|
Other assets, current and non-current
|
25.8
|
|
|
|
Total assets acquired
|
1,532.4
|
|
|
|
Current liabilities
|
109.4
|
|
|
|
Other liabilities (non-current)
|
33.3
|
|
|
|
Deferred tax liabilities, net (non-current)
|
175.8
|
|
|
|
Debt
|
366.3
|
|
|
|
Total liabilities assumed
|
684.8
|
|
|
|
Net assets acquired
|
$
|
847.6
|
|
|
(1)During fiscal 2019, the Company recognized a full impairment of the IPR&D asset related to VTS-270 of $274.5 million. Refer to Note 14 for further information.
(2)Refer to Note 14 for further information relating to the full goodwill impairment recorded in fiscal 2018.
The following reconciles the total consideration to net assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consideration, net of cash
|
$
|
698.0
|
|
|
|
Plus: cash assumed in acquisition
|
149.6
|
|
|
|
Net assets acquired
|
$
|
847.6
|
|
|
Intangible assets acquired consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Asset Acquired
|
|
Amount
|
|
Amortization Period
|
|
Discount Rate
|
|
Segment
|
|
|
|
Completed technology - Amitiza
|
|
$
|
634.0
|
|
|
9 years
|
|
14.0
|
%
|
|
Specialty Brands
|
|
|
|
Completed technology - Other (1)
|
|
11.0
|
|
|
8 years
|
|
14.0
|
|
|
Specialty Brands
|
|
|
|
In-process research and development - VTS-270 (2)
|
|
274.5
|
|
|
Non-Amortizable
|
|
15.0
|
|
|
Specialty Brands
|
(1)During fiscal 2019, the intellectual property related to this intangible asset was sold, and therefore is no longer reflected in the Company's consolidated balance sheet as of December 27, 2019.
(2)During fiscal 2019, the Company recognized a full impairment of the IPR&D asset related to VTS-270 of $274.5 million.
The fair value of the intangible assets was determined using the income approach. The fair value of the IPR&D, completed technology and trademark was determined using the income approach, which is a valuation technique that provides an estimate of fair value of the assets based on the market participant expectations of cash flows the asset would generate. The discount rates were developed after assigning a probability of success to achieving the projected cash flows based on the current stage of development, inherent uncertainty in the U.S. Food and Drug Administration ("FDA") approval process and risks associated with commercialization of a new product. Based on the Company's preliminary estimate, the excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents future product development, the assembled workforce, and the tax status of the transaction. The goodwill was not deductible for U.S. income tax purposes.
Financial Results - The amount of net sales in the Company's consolidated statements of operations related to the Sucampo were $192.9 million, $217.2 million and $190.5 million for fiscal 2020, 2019 and 2018, respectively. The amount of operating income for fiscal 2020 and operating losses for fiscal 2019 and 2018 included in the Company's consolidated statement of operations were $65.3 million, $210.6 million and $369.1 million, respectively. Included within the Sucampo operating results was the full impairment of the VTS-270 intangible asset in fiscal 2019 and a charge for the goodwill allocated to Sucampo at the time of acquisition as a result of the full goodwill impairment in fiscal 2018. Also included within the fiscal 2020, 2019 and 2018 results was $70.4 million, $70.9 million and $62.9 million of amortization associated with intangibles recognized from this acquisition, respectively, and zero, $10.0 million and $118.8 million of expense associated with fair value adjustments of acquired inventory, respectively. During fiscal 2020, 2019 and 2018, the Company in total recognized zero, $10.0 million and $120.8 million, respectively, of expense associated with fair value adjustments of acquired inventory. This expense was included within cost of sales.
Acquisition-Related Costs - Acquisition-related costs incurred for each of the acquisitions discussed above were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Acquisition-related costs
|
|
|
2019
|
|
2018
|
|
Sucampo
|
|
|
$
|
5.2
|
|
|
$
|
4.2
|
|
|
Other
|
|
|
0.6
|
|
|
2.2
|
|
|
Total acquisition-related costs
|
|
|
$
|
5.8
|
|
|
$
|
6.4
|
|
License Agreements
Silence Therapeutics
In July 2019, the Company entered into a license and collaboration agreement with Silence Therapeutics plc ("Silence") that will allow the companies to develop and commercialize ribonucleic acid interference ("RNAi") drug targets designed to inhibit the complement cascade, a group of proteins that are involved in the immune system and that play a role in the development of inflammation. These proteins are known to contribute to the pathogenesis of many diseases, including autoimmune disease. Under the terms of the agreement, the Company will obtain an exclusive worldwide license to Silence's C3 complement asset with options to license up to two additional complement-targeted assets in Silence's preclinical complement-directed RNAi development program. Silence will be responsible for preclinical activities, and for executing the development program of each asset until the end of Phase 1, after which the Company will assume clinical development and responsibility for global commercialization. The Company has since exercised its option on the two additional target assets.
During fiscal 2019, the Company provided Silence an upfront payment of $20.0 million with cash on hand, which was recorded within R&D expense, and gained an exclusive worldwide license to Silence's C3 complement asset. In fiscal 2020, Silence also received $2.0 million for each exercise of the second and third options to expand the total C3 target assets to three. Silence is also eligible to receive up to $10.0 million in research milestones for each target asset, in addition to funding for Phase 1 clinical development including good manufacturing practice (GMP) manufacturing. Silence will be responsible for preclinical activities, and for executing the development program until the end of Phase 1, after which the Company will assume clinical development and responsibility for global commercialization. If approved, Silence could receive up to $563.0 million per target asset in commercial milestone payments and tiered low double-digit to high-teen royalties on net sales for approved products.
Ofirmev
As part of the acquisition of Cadence Pharmaceuticals, Inc. ("Cadence" or "Cadence Acquisition") in March 2014, the Company acquired the exclusive development and commercialization rights to Ofirmev® (acetaminophen) injection ("Ofirmev") in the U.S. and Canada, as well as the rights to the patents and technology, which were originally in-licensed by Cadence from Bristol-Myers Squibb Company ("BMS") in March 2006. BMS sublicensed these rights to Cadence under a license agreement with SCR Pharmatop S.A., and the Company has the right to grant sublicenses to third parties. Under this license agreement, the Company made the final milestone payment of $15.0 million in fiscal 2018. In addition, the Company is obligated to pay royalties on sales of the product. During fiscal 2020, 2019 and 2018, the Company paid royalties of $66.1 million, $69.8 million and $76.9 million, respectively, which were recorded within cost of sales on the consolidated statements of operations.
Advanced Accelerator Applications
In 2007, the Company's Nuclear Imaging business entered into a license agreement with BioSynthema, Inc. ("BioSynthema"), which was subsequently amended in 2010 when Advanced Accelerator Applications ("AAA") acquired BioSynthema. Pursuant to the amended agreement, upon the first commercial sale of Lutathera® ("Lutathera"), AAA is to provide the Company with a royalty based on net sales of the product through January 1, 2020. In early 2018, the FDA approved Lutathera for treatment of gastroenteropancreatic neuroendocrine tumors and commercial sales commenced. During fiscal 2019 and 2018, in relation to this agreement, the Company recognized royalty income of $39.0 million and $15.5 million, respectively, which was recognized within other income, net in the consolidated statements of operations.
|
|
|
|
|
|
|
|
8.
|
Restructuring and Related Charges
|
During fiscal 2018 and 2016, the Company launched restructuring programs designed to improve its cost structure. Charges of $100.0 million to $125.0 million were provided for under each program. Each program generally commenced upon substantial completion of the previous program. In addition to the aforementioned restructuring programs, the Company has taken restructuring actions to generate synergies from its acquisitions.
Net restructuring and related charges by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Specialty Brands
|
$
|
0.1
|
|
|
$
|
(13.7)
|
|
|
$
|
54.6
|
|
|
Specialty Generics
|
0.1
|
|
|
10.0
|
|
|
5.3
|
|
|
Corporate
|
49.6
|
|
|
2.0
|
|
|
48.3
|
|
|
Restructuring and related charges, net
|
49.8
|
|
|
(1.7)
|
|
|
108.2
|
|
|
Less: accelerated depreciation
|
(12.3)
|
|
|
—
|
|
|
(5.2)
|
|
|
Restructuring charges, net
|
$
|
37.5
|
|
|
$
|
(1.7)
|
|
|
$
|
103.0
|
|
Net restructuring and related charges by program from continuing operations are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
2018 Program
|
$
|
52.0
|
|
|
$
|
9.8
|
|
|
$
|
5.2
|
|
|
2016 Program
|
(0.3)
|
|
|
(10.6)
|
|
|
71.6
|
|
|
Acquisition programs
|
(1.9)
|
|
|
(0.9)
|
|
|
31.4
|
|
|
Total programs
|
49.8
|
|
|
(1.7)
|
|
|
108.2
|
|
|
Less: non-cash charges, including accelerated depreciation
|
(23.8)
|
|
|
—
|
|
|
(5.2)
|
|
|
Total charges expected to be settled in cash
|
$
|
26.0
|
|
|
$
|
(1.7)
|
|
|
$
|
103.0
|
|
The following table summarizes cash activity for restructuring reserves, substantially all of which related to contract termination costs, employee severance and benefits and exiting of certain facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Program
|
|
2016 Program
|
|
Acquisition Programs
|
|
Total
|
|
Balance as of December 29, 2017
|
$
|
—
|
|
|
$
|
14.7
|
|
|
$
|
0.8
|
|
|
$
|
15.5
|
|
|
Charges from continuing operations
|
2.2
|
|
|
76.9
|
|
|
29.9
|
|
|
109.0
|
|
|
Changes in estimate from continuing operations
|
—
|
|
|
(5.3)
|
|
|
(0.7)
|
|
|
(6.0)
|
|
|
Cash payments
|
—
|
|
|
(23.4)
|
|
|
(22.2)
|
|
|
(45.6)
|
|
|
Reclassifications
|
—
|
|
|
(1.9)
|
|
|
—
|
|
|
(1.9)
|
|
|
Balance as of December 28, 2018
|
2.2
|
|
|
61.0
|
|
|
7.8
|
|
|
71.0
|
|
|
Charges from continuing operations
|
11.2
|
|
|
4.0
|
|
|
0.1
|
|
|
15.3
|
|
|
Changes in estimate from continuing operations
|
(1.4)
|
|
|
(14.6)
|
|
|
(1.0)
|
|
|
(17.0)
|
|
|
Cash payments
|
(9.3)
|
|
|
(13.1)
|
|
|
(2.4)
|
|
|
(24.8)
|
|
|
Reclassifications (1)
|
—
|
|
|
(5.0)
|
|
|
(4.3)
|
|
|
(9.3)
|
|
|
Currency translation and other
|
—
|
|
|
(1.0)
|
|
|
—
|
|
|
(1.0)
|
|
|
Balance as of December 27, 2019
|
2.7
|
|
|
31.3
|
|
|
0.2
|
|
|
34.2
|
|
|
Charges from continuing operations
|
28.6
|
|
|
0.1
|
|
|
—
|
|
|
28.7
|
|
|
Changes in estimate from continuing operations
|
(0.4)
|
|
|
(0.4)
|
|
|
(1.9)
|
|
|
(2.7)
|
|
|
Cash payments
|
(20.1)
|
|
|
(30.7)
|
|
|
(0.2)
|
|
|
(51.0)
|
|
|
Reclassifications (2)
|
(10.0)
|
|
|
—
|
|
|
—
|
|
|
(10.0)
|
|
|
Currency translation and other
|
0.2
|
|
|
(0.3)
|
|
|
1.9
|
|
|
1.8
|
|
|
Balance as of December 25, 2020
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
(1)Represents the reclassification of lease liabilities, net to lease liabilities and lease assets, which are reflected within other liabilities and other assets on the consolidated balance sheet, due to the adoption of ASU 2016-02.
(2)Represents the reclassification of certain restructuring reserve balances to LSTC as a result of the Company rejecting certain of its executory contracts.
As of December 25, 2020, net restructuring and related charges incurred cumulative to date were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Program (1)
|
|
2016 Program (2)
|
|
Specialty Brands
|
$
|
3.0
|
|
|
$
|
68.1
|
|
|
Specialty Generics
|
10.1
|
|
|
14.6
|
|
|
|
|
|
|
|
Corporate
|
53.9
|
|
|
28.6
|
|
|
|
$
|
67.0
|
|
|
$
|
111.3
|
|
(1)There is no specified time period associated with this restructuring program.
(2)The 2016 Program was completed in fiscal 2020.
In fiscal 2018, the Company discontinued the marketing of Raplixa after an evaluation of strategic options and incurred restructuring expenses of $51.1 million under the 2016 Program, consisting primarily of estimated contract termination costs related to the production of Raplixa. During fiscal 2019, the Company finalized the settlement of these contract termination costs.
All of the restructuring reserves were included in accrued and other current liabilities on the Company's consolidated balance sheets. Amounts paid in the future may differ from the amount currently recorded.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. The CARES Act was a response to the market volatility and instability resulting from the novel coronavirus ("COVID-19") pandemic. It includes provisions to support individuals and businesses in the form of loans, grants, and tax changes among other types of relief. Estimates of the effects of the changes to the U.S. tax code have been incorporated into the Company’s fiscal 2020 provision for income taxes, as applicable.
The CARES Act income tax provisions applicable to the Company include, but are not limited to (1) carrybacks of certain net operating losses ("NOL(s)") generated in tax years beginning after December 31, 2017 and before January 1, 2021 to the preceding five taxable years, (2) suspension of the 80.0% taxable income limitation for NOLs generated in tax years beginning after December 31, 2017 and before January 1, 2021, (3) increase in the limitation of the interest expense deduction under Internal Revenue Code ("IRC") §163(j) from 30.0% to 50.0% of adjusted taxable income for any taxable year beginning in 2019 or 2020, (4) expansion of the charitable contribution deduction limit to 25.0% of taxable income versus the previous 10.0% limitation for contributions made during 2020, and (5) acceleration of alternative minimum tax credits being refunded incrementally in tax years 2018, 2019, 2020 and 2021 to recover the entire remaining balance in either the 2018 or 2019 tax year.
As a result of the CARES Act, the Company is able to carryback a portion of its prior year and estimated current year U.S. Federal NOLs resulting in anticipated cash tax refunds recorded as $177.8 million of current receivable and $136.6 million of non-current receivable. These refunds are subject to review and audit by the Internal Revenue Service ("IRS"), and the timing of the receipt of the refunds by the Company is dependent upon the actions of the IRS. A tax benefit of $281.5 million has been recognized in fiscal 2020. The carryback of the U.S. Federal NOLs has an ancillary effect on the Company’s unrecognized tax benefits, as disclosed below.
On July 15, 2020, the activities of the Company's principal executive offices were relocated from the United Kingdom ("U.K.") to Ireland, which resulted in a change in the Company's tax residence to Ireland. Mallinckrodt plc has always been and remains incorporated in Ireland. Relocation of Mallinckrodt plc’s tax residence to Ireland allows the Company to mitigate the potential impacts of the U.K.’s departure from the European Union and aligns with the Company's commercial activity in Ireland. The Company continues to be subject to taxation in various tax jurisdictions worldwide. Accordingly, in fiscal 2020 the Company will report the Irish tax jurisdiction as the Company's domestic jurisdiction using an Irish statutory tax rate of 12.5% versus the U.K. statutory rate of 19.0%, and the international jurisdiction for fiscal 2020 will represent areas outside the Irish tax jurisdiction. There is no material financial impact to this change.
The domestic and international components(1) of loss from continuing operations before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Domestic
|
$
|
(656.9)
|
|
|
$
|
(75.3)
|
|
|
$
|
(233.7)
|
|
|
International
|
(303.9)
|
|
|
(1,516.2)
|
|
|
(3,818.3)
|
|
|
Total
|
$
|
(960.8)
|
|
|
$
|
(1,591.5)
|
|
|
$
|
(4,052.0)
|
|
(1) Domestic reflects Ireland in fiscal 2020, and U.K. in fiscal 2019 and 2018.
Significant components(1) of income taxes related to continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
Domestic
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
(0.2)
|
|
|
International
|
(375.4)
|
|
|
21.7
|
|
|
113.0
|
|
|
Current income tax (benefit) provision
|
(375.3)
|
|
|
21.8
|
|
|
112.8
|
|
|
Deferred:
|
|
|
|
|
|
|
Domestic
|
102.2
|
|
|
(1.1)
|
|
|
1.4
|
|
|
International
|
282.0
|
|
|
(605.0)
|
|
|
(544.3)
|
|
|
Deferred income tax provision (benefit)
|
384.2
|
|
|
(606.1)
|
|
|
(542.9)
|
|
|
Total
|
$
|
8.9
|
|
|
$
|
(584.3)
|
|
|
$
|
(430.1)
|
|
(1) Domestic reflects Ireland in fiscal 2020, and U.K. in fiscal 2019 and 2018.
The domestic current income tax provision reflects a tax benefit of $0.2 million, $1.2 million and $8.5 million from using NOL carryforwards for fiscal 2020, 2019 and 2018, respectively. For fiscal 2020, domestic reflects Ireland; and for fiscal 2019 and 2018, domestic reflects the U.K. The international current income tax provision reflects a tax benefit of $33.4 million, $0.9 million and $13.7 million from using NOL carryforwards for fiscal 2020, 2019 and 2018, respectively. The fiscal 2020 international current income tax provision also includes a tax benefit of $1.0 million related to refundable credits and a tax benefit of $281.5 million related to carryback claims. The international credit utilization is comprised of credit carryforwards.
As further discussed in Note 1, the Company concluded that there is substantial doubt about its ability to continue as a going concern within one year from the date of issuance of the consolidated financial statements. The Company considered this in determining that certain net deferred tax assets were no longer more likely than not realizable. As a result, the Company recorded an increase in a valuation allowance of $204.9 million against its beginning net deferred tax assets.
During fiscal years 2020, 2019 and 2018, net cash payments for income taxes were $39.9 million, $30.7 million and $12.4 million, respectively.
The reconciliation between domestic income taxes at the statutory rate and the Company's provision for income taxes on continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Benefit for income taxes at domestic statutory income tax rate (1)
|
$
|
(120.1)
|
|
|
$
|
(302.4)
|
|
|
$
|
(770.1)
|
|
|
Adjustments to reconcile to income tax provision:
|
|
|
|
|
|
|
Rate difference between domestic and international jurisdictions (2)
|
(315.3)
|
|
|
(206.3)
|
|
|
(235.7)
|
|
|
Adjustments to accrued income tax liabilities and uncertain tax positions
|
14.7
|
|
|
(12.4)
|
|
|
60.1
|
|
|
Interest and penalties on accrued income tax liabilities and uncertain tax positions
|
2.0
|
|
|
(6.3)
|
|
|
13.1
|
|
|
|
|
|
|
|
|
|
Credits, principally research and orphan drug (3)
|
(11.2)
|
|
|
(13.5)
|
|
|
(25.9)
|
|
|
Impairments non deductible
|
—
|
|
|
—
|
|
|
788.7
|
|
|
Permanently nondeductible and nontaxable items (4)
|
2.8
|
|
|
98.1
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
Divestitures (5)
|
—
|
|
|
9.6
|
|
|
(2.7)
|
|
|
U.S. Tax Reform (6)
|
(281.5)
|
|
|
—
|
|
|
(8.5)
|
|
|
Legal entity reorganization (7)
|
82.0
|
|
|
(212.8)
|
|
|
(256.0)
|
|
|
Separation costs
|
8.4
|
|
|
—
|
|
|
—
|
|
|
Reorganization items, net
|
8.8
|
|
|
—
|
|
|
—
|
|
|
Other
|
0.1
|
|
|
—
|
|
|
(0.3)
|
|
|
Valuation allowances (4)
|
618.2
|
|
|
61.7
|
|
|
—
|
|
|
Provision (benefit) for income taxes
|
$
|
8.9
|
|
|
$
|
(584.3)
|
|
|
$
|
(430.1)
|
|
(1)The statutory tax rate reflects the Irish statutory tax rate of 12.5% for fiscal 2020, and the U.K. statutory tax rate of 19.0% for fiscal 2019 and 2018.
(2)For fiscal 2019 and fiscal 2018, includes the impact of certain recurring valuation allowances for domestic and international jurisdictions.
(3)For fiscal 2019, the research and orphan drug credits decreased primarily as a result of the impact of the Tax Cut and Jobs Act of 2017 ("TCJA"). For fiscal 2018, these credits increased in conjunction with the Company's increased investment in qualified research.
(4)For fiscal 2020, an expense of $204.9 million was included as a discrete valuation allowance on certain net deferred tax assets that were no longer more likely than not realizable, as explained further above. For fiscal 2019, the valuation allowances and permanently nondeductible and nontaxable item were primarily driven by the impact from the opioid-related litigation settlement charge. Refer to Note 20 for further discussion. Additional valuation allowance impacts are netted within other line items, as referenced in the associated footnotes.
(5)The Company completed the sale of its wholly owned subsidiary BioVectra in November 2019 and a portion of its Hemostasis business during fiscal 2018.
(6)For fiscal 2020, the Company has recognized a tax benefit as a result of the CARES Act. Associated unrecognized tax benefit and valuation allowance are netted within this line. For fiscal 2018, the Company completed its analysis of the TCJA and recognized an additional tax benefit to the original estimate recorded in fiscal 2017.
(7)Associated unrecognized tax benefit and valuation allowance are netted within this line.
The rate difference between domestic and international jurisdictions changed from $206.3 million of tax benefit to $315.3 million of tax benefit for fiscal 2019 to fiscal 2020, respectively. Of the $109.0 million increase in the tax benefit, $92.7 million of the increase results from presenting the impact of recurring valuation allowances within the rate difference between domestic and international jurisdictions in fiscal 2019 and within valuation allowances in fiscal 2020 and an increase of $48.9 million is attributable to the Medicaid lawsuit; partially offset by a $79.0 million decrease attributable to the fiscal 2019 gain on debt extinguishment, a $60.9 million decrease attributable to the fiscal 2019 opioid-related settlement charge and a $30.0 million decrease attributable to changes in operating income. The remaining $137.3 million increase is predominately attributable to the change in the referenced rate from the U.K. statutory rate of 19.0% to the Irish statutory rate of 12.5%.
The rate difference between domestic and international jurisdictions changed from $235.7 million of tax benefit to $206.3 million of tax benefit for fiscal 2018 to fiscal 2019, respectively. The $29.4 million decrease in the tax benefit included a $101.0 million decrease attributable to the non-restructuring impairment charges, a $45.8 million decrease attributable to changes in operating income, a $20.2 million decrease attributable to divestitures; partially offset by an increase of $76.7 million attributable to the gain on debt extinguishment and $60.9 million attributable to the opioid-related settlement charge.
During fiscal 2020, the Company commenced the reorganization of its intercompany financing and associated asset and legal entity ownership in preparation for and in response to the Chapter 11 bankruptcy filing, described in Note 2. As a result, the Company recognized current income tax expense of $17.9 million and deferred income tax expense of $64.1 million with a corresponding net increase to deferred tax liabilities.
The following table summarizes the activity related to the Company's unrecognized tax benefits, excluding interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Balance at beginning of period
|
$
|
398.6
|
|
|
$
|
287.7
|
|
|
$
|
182.5
|
|
|
Additions related to current year tax positions
|
71.1
|
|
|
123.5
|
|
|
19.6
|
|
|
Additions related to prior period tax positions
|
9.8
|
|
|
19.2
|
|
|
125.1
|
|
|
Reductions related to prior period tax positions
|
(14.2)
|
|
|
(5.7)
|
|
|
(32.7)
|
|
|
|
|
|
|
|
|
|
Settlements
|
(80.3)
|
|
|
(1.0)
|
|
|
(2.0)
|
|
|
Lapse of statute of limitations
|
(36.0)
|
|
|
(25.1)
|
|
|
(4.8)
|
|
|
Balance at end of period
|
$
|
349.0
|
|
|
$
|
398.6
|
|
|
$
|
287.7
|
|
Unrecognized tax benefits, excluding interest, were reported in the following consolidated balance sheet captions in the amounts shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
December 27, 2019
|
|
Other assets (1)
|
$
|
256.4
|
|
|
$
|
204.7
|
|
|
|
|
|
|
|
Other income tax liabilities
|
83.2
|
|
|
193.9
|
|
|
Deferred income taxes
|
9.4
|
|
|
—
|
|
|
|
$
|
349.0
|
|
|
$
|
398.6
|
|
(1)Included as a reduction to deferred tax assets.
Included within total unrecognized tax benefits as of December 25, 2020, December 27, 2019 and December 28, 2018 were $85.9 million, $395.9 million and $275.8 million, respectively, of unrecognized tax benefits, which if favorably settled would benefit the effective tax rate, of which approximately $20.0 million would be reported in discontinued operations in fiscal 2019 and 2018. The remaining unrecognized tax benefits are reflected as the write-off of related other tax assets. If these unrecognized tax benefits were recognized, they would be offset by a valuation allowance in fiscal 2020. During fiscal 2020, due to a lapse of the statute of limitations, $18.1 million of tax and interest on unrecognized tax benefits related to the Nuclear Imaging business were eliminated, and a benefit of $18.1 million was recorded in discontinued operations within the consolidated statement of operations. During fiscal 2020, the Company recorded $23.7 million of additional interest and penalties through tax provision and decreased accrued interest and penalties by $39.9 million related to prior period reductions, settlements and lapse of statute of limitations. During fiscal 2019 and 2018, the Company had a net decrease of interest and penalties activity of $4.2 million and a net increase of interest and penalties activity of $30.0 million, respectively. The total amount of accrued interest and penalties related to uncertain tax positions was $16.7 million, $32.9 million and $37.1 million, respectively.
It is reasonably possible that within the next twelve months the unrecognized tax benefits could decrease by up to $25.7 million and the amount of related interest and penalties could decrease by up to $6.9 million as a result of payments or releases due to the resolution of examinations, appeals and litigation, and the expiration of various statutes of limitation.
In August 2020, a settlement was reached with the IRS related to the audit of Mallinckrodt Hospital Products Inc.'s ("MHP") (formerly known as Cadence Pharmaceuticals, Inc. ("Cadence")) tax year ended September 26, 2014. Cadence was acquired as a U.S. subsidiary in March 2014. Following the acquisition of Cadence, the Company transferred certain rights and risks in the Ofirmev intellectual property ("Transferred IP") to one of its wholly owned non-U.S. subsidiaries. The transfer occurred at a price determined in conjunction with external advisors, in accordance with applicable Treasury Regulations and with reference to the $1,329.0 million taxable consideration the Company paid to the shareholders of Cadence. The IRS asserted the transfer price of the Transferred IP was understated. The settlement increased the transfer price of the Transferred IP, resulting in an increase to taxable income of $356.5 million and underpayment interest of $11.8 million. The increase to taxable income was satisfied through a noncash offset against the Company’s U.S. Federal NOLs and interest expense for the tax year ended September 25, 2020, while the underpayment interest was satisfied through a cash payment of $11.8 million. The Company was adequately reserved for this item; therefore there were no impacts to the consolidated statement of operations for fiscal 2020.
Certain of the Company's subsidiaries continue to be subject to examination by taxing authorities. The earliest open years subject to examination for various jurisdictions, including Ireland, the U.S., Japan, Luxembourg, Switzerland and the U.K. are from 2013 to present and the earliest open year for the U.S. state tax jurisdictions is 2009.
Income taxes payable, including uncertain tax positions and related interest accruals, was reported in the following consolidated balance sheet captions in the amounts shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
December 27, 2019
|
|
Accrued and other current liabilities
|
$
|
26.5
|
|
|
$
|
15.0
|
|
|
Other income tax liabilities
|
100.1
|
|
|
227.1
|
|
|
|
$
|
126.6
|
|
|
$
|
242.1
|
|
Tax receivables were included in the following consolidated balance sheet captions in the amounts shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
December 27, 2019
|
|
Other assets
|
$
|
139.4
|
|
|
$
|
3.1
|
|
|
Prepaid expenses and other current assets
|
188.7
|
|
|
8.0
|
|
|
|
$
|
328.1
|
|
|
$
|
11.1
|
|
Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred tax asset (liability) at the end of each fiscal year were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
December 27, 2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax loss and credit carryforward
|
$
|
4,026.0
|
|
|
$
|
2,263.4
|
|
|
Capital tax loss carryforward and related assets
|
1,600.1
|
|
|
—
|
|
|
Intangible assets
|
—
|
|
|
981.2
|
|
|
Opioid-related litigation settlement liability
|
269.3
|
|
|
273.7
|
|
|
Excess interest
|
150.7
|
|
|
81.5
|
|
|
Other
|
294.9
|
|
|
200.4
|
|
|
|
6,341.0
|
|
|
3,800.2
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
(191.2)
|
|
|
(139.4)
|
|
|
|
|
|
|
|
Investment in partnership
|
(74.8)
|
|
|
(178.9)
|
|
|
Other
|
(44.8)
|
|
|
(46.3)
|
|
|
|
(310.8)
|
|
|
(364.6)
|
|
|
Net deferred tax asset before valuation allowances
|
6,030.2
|
|
|
3,435.6
|
|
|
Valuation allowances
|
(6,110.8)
|
|
|
(3,131.5)
|
|
|
Net deferred tax (liability) assets
|
$
|
(80.6)
|
|
|
$
|
304.1
|
|
The net deferred tax asset before valuation allowances increased from $3,435.6 million as of December 27, 2019 to $6,030.2 million as of December 25, 2020 due to a $1,157.0 million increase to tax loss and credit carryforwards predominately related to current and prior years' operational activity, a $1,048.4 million increase associated with the reorganization of the Company's intercompany financing and associated asset and legal entity ownership, a $282.6 million increase associated with the amortization of
intangible assets, and a $165.8 million decrease associated with the CARES Act. The $1,048.4 million increase associated with the reorganization of the Company's intercompany financing and associated asset and legal entity ownership includes an increase in capital tax loss carryforwards and related assets of $1,600.1 million, an increase in tax loss and credit carryforwards of $605.6 million, an increase related to a reduction to the investment in partnership deferred tax liability of $103.6 million, an increase to other deferred tax assets of $15.5 million, and a decrease to intangible assets of $1,276.4 million.
The deferred tax asset valuation allowances of $6,110.8 million and $3,131.5 million as of December 25, 2020 and December 27, 2019, respectively, relate both to the Company's substantial doubt about its ability to continue as a going concern, as well as the uncertainty of the utilization of certain deferred tax assets, driven by domestic and international net operating and capital losses, credits, intangible assets and the opioid-related settlement liability.
Deferred taxes were reported in the following consolidated balance sheet captions in the amounts shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
December 27, 2019
|
|
Other assets
|
$
|
—
|
|
|
$
|
315.1
|
|
|
Deferred income taxes
|
(80.6)
|
|
|
(11.0)
|
|
|
Net deferred tax (liability) asset
|
$
|
(80.6)
|
|
|
$
|
304.1
|
|
As of December 25, 2020, the Company had approximately $3,908.8 million of NOL carryforwards in certain international jurisdictions measured at the applicable statutory rates, of which $1,832.2 million have no expiration and the remaining $2,076.6 million will expire in future years through 2041. The Company had $32.9 million of domestic NOL carryforwards measured at the applicable statutory rates at December 25, 2020, which have no expiration date.
As of December 25, 2020, the Company had $179.8 million of capital loss carryforwards in certain international jurisdictions measured at the applicable statutory rates, which will expire in future years through 2025. As of December 25, 2020, the Company had approximately $1,194.9 million of domestic capital loss carryforwards measured at the applicable statutory rates, which have no expiration date.
As of December 25, 2020, the Company also had $84.3 million of tax credits available to reduce future income taxes payable, in international jurisdictions, of which $2.3 million have no expiration and the remainder will expire in future years through 2041.
As of December 25, 2020, the Company's financial reporting basis in subsidiaries that may be subject to tax was in excess of its corresponding tax basis by $15.1 million. Such excess amount is considered to be indefinitely reinvested and it is not practicable to determine the cumulative amount of tax liability that would arise if this indefinitely reinvested amount were realized due to a variety of factors including the complexity of the Company's legal entity structure as well as the timing, extent, and nature of any hypothetical realization.
Loss per share is computed by dividing net loss by the number of weighted-average shares outstanding during the period. Dilutive securities, including participating securities, have not been included in the computation of loss per share as the Company reported a net loss from continuing operations during all periods presented below and therefore, the impact would be anti-dilutive.
The weighted-average number of shares outstanding used in the computations of both basic and diluted loss per share were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Basic
|
84.5
|
|
|
83.9
|
|
|
84.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The computation of diluted weighted-average shares outstanding for fiscal 2020, 2019 and 2018 excluded approximately 5.6 million, 6.3 million and 3.3 million, respectively, shares of equity award because the effect would have been anti-dilutive.
Inventories were comprised of the following at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25,
2020
|
|
December 27,
2019
|
|
Raw materials
|
$
|
58.1
|
|
|
$
|
62.7
|
|
|
Work in process
|
200.7
|
|
|
166.5
|
|
Finished goods
|
86.1
|
|
|
82.9
|
|
Inventories
|
$
|
344.9
|
|
|
$
|
312.1
|
|
|
|
|
|
|
|
|
|
12.
|
Property, Plant and Equipment
|
The gross carrying amount and accumulated depreciation of property, plant and equipment were comprised of the following at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
December 27, 2019
|
|
Land
|
$
|
43.6
|
|
|
$
|
43.4
|
|
|
Buildings
|
416.9
|
|
|
363.6
|
|
|
Capitalized software
|
134.0
|
|
|
142.2
|
|
|
Machinery and equipment
|
1,260.4
|
|
|
1,157.0
|
|
|
Construction in process
|
56.0
|
|
|
193.9
|
|
|
|
1,910.9
|
|
|
1,900.1
|
|
|
Less: accumulated depreciation
|
(1,077.8)
|
|
|
(1,003.6)
|
|
|
Property, plant and equipment, net
|
$
|
833.1
|
|
|
$
|
896.5
|
|
Depreciation expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Depreciation expense
|
$
|
114.0
|
|
|
$
|
97.7
|
|
|
$
|
111.9
|
|
As a result of the Chapter 11 Cases, certain of the Company's lease liabilities were classified as LSTC as of December 25, 2020 due to rejection of executory contracts. Refer to Note 2 for further information on LSTC.
Lease assets and liabilities related to the Company's operating leases are reported in the following consolidated balance sheet captions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25,
2020
|
|
December 27,
2019
|
|
Other assets
|
$
|
58.6
|
|
|
$
|
83.5
|
|
|
|
|
|
|
|
Accrued and other current liabilities
|
$
|
13.0
|
|
|
$
|
19.2
|
|
|
Other liabilities
|
28.0
|
|
|
70.2
|
|
|
Other current and non-current liabilities subject to compromise
|
31.9
|
|
|
—
|
|
|
Total lease liabilities
|
$
|
72.9
|
|
|
$
|
89.4
|
|
Dependent on the nature of the leased asset, lease expense is included within cost of sales or SG&A. The primary components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
Lease cost:
|
|
|
|
|
Operating lease cost
|
$
|
21.2
|
|
|
$
|
21.3
|
|
|
Short-term lease cost
|
1.1
|
|
|
3.5
|
|
|
Variable lease cost
|
3.1
|
|
|
—
|
|
|
Total lease cost
|
$
|
25.4
|
|
|
$
|
24.8
|
|
Prior to the adoption of Topic 842, rental expense under facility, vehicle and equipment operating leases was $24.8 million for fiscal 2018.
Lease terms and discount rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25,
2020
|
|
December 27,
2019
|
|
Weighted-average remaining lease term (in years) - operating lease
|
6.1
|
|
6.6
|
|
Weighted-average discount rate - operating leases
|
3.9
|
%
|
|
3.8
|
%
|
Contractual maturities of operating lease liabilities as of December 25, 2020 were as follows:
|
|
|
|
|
|
|
|
Fiscal 2021
|
$
|
20.3
|
|
|
Fiscal 2022
|
16.7
|
|
|
Fiscal 2023
|
13.6
|
|
|
Fiscal 2024
|
10.8
|
|
|
Fiscal 2025
|
7.9
|
|
|
Thereafter
|
22.8
|
|
|
Total lease payments
|
92.1
|
|
|
Less: Interest
|
(19.2)
|
|
|
Present value of lease liabilities
|
72.9
|
|
|
Less: Amounts reclassified to liabilities subject to compromise
|
(31.9)
|
|
|
Present value of lease liabilities not subject to compromise
|
$
|
41.0
|
|
Other supplemental cash flow information related to leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
23.1
|
|
|
$
|
23.2
|
|
|
Lease assets obtained in exchange for lease obligations:
|
|
|
|
|
Operating leases
|
6.9
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
14.
|
Goodwill and Intangible Assets
|
2018 Goodwill Impairment Analysis
During fiscal 2018, the Company's annual goodwill impairment analysis resulted in the recognition of a full goodwill impairment of $3,672.8 million related to the Specialty Brands reporting unit. The Company performed its annual goodwill impairment analysis for the Specialty Brands reporting unit as of the first day of the fourth quarter. The Company's 2018 annual assessment first considered its internally developed future cash flows, which reflect the Company's overall strategy, future growth and value proposition. At the time of this analysis there continued to be a disparity between the Company's anticipated future performance and present uncertainty reflected in its market capitalization, driven by a sustained decrease in its share price. The Company determined that its share price had been adversely affected primarily by uncertainties regarding patient withdrawal issues impacting net sales of Acthar Gel, ongoing INOmax® (nitric oxide) gas, for inhalation ("INOmax") patent litigation and the perceived value of its various pipeline products.
Given the passage of time since first experiencing a substantial decline in its share price during the three months ended December 29, 2017 and the fact that the aforementioned uncertainties were not expected to be resolved in the near-term, the Company determined that its goodwill was fully impaired.
For purposes of the 2018 goodwill impairment assessment for the Specialty Brands reporting unit, the Company made various assumptions regarding estimated future cash flows, discount rate and other factors in determining the respective fair value of the reporting unit using the income approach. The projections of future cash flows were discounted based on a weighted average cost of capital of 12.5% that was determined from relevant market comparisons, adjusted upward for specific reporting unit risks. A terminal value growth rate was applied to the terminal year cash flows, representing the Company's estimate of stable cash flows. The fair value of the Specialty Brands reporting unit represents the sum of the discounted cash flows from the discrete period and the terminal year cash flows.
Intangible Assets
The gross carrying amount and accumulated amortization of intangible assets were comprised of the following at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
December 27, 2019
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Amortizable:
|
|
|
|
|
|
|
|
|
Completed technology
|
$
|
10,394.6
|
|
|
$
|
4,586.6
|
|
|
$
|
10,456.9
|
|
|
$
|
3,822.8
|
|
|
License agreements
|
120.1
|
|
78.1
|
|
|
120.1
|
|
74.1
|
|
|
Trademarks
|
77.7
|
|
23.5
|
|
|
77.7
|
|
20.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
10,592.4
|
|
|
$
|
4,688.2
|
|
|
$
|
10,654.7
|
|
|
$
|
3,917.0
|
|
|
Non-Amortizable:
|
|
|
|
|
|
|
|
|
Trademarks
|
$
|
35.0
|
|
|
|
|
$
|
35.0
|
|
|
|
|
In-process research and development
|
245.3
|
|
|
|
|
245.3
|
|
|
|
|
Total
|
$
|
280.3
|
|
|
|
|
$
|
280.3
|
|
|
|
The Company recorded impairment charges totaling $63.5 million, $388.0 million and $220.3 million during fiscal 2020, 2019 and 2018, respectively. The valuation method used to approximate fair value in each of these periods was based on the estimated discounted cash flows for the respective asset. The fiscal 2020 impairment charge relates to the Ofirmev product, discussed further below. The fiscal 2019 impairment charges included $274.5 million related to VTS-270, primarily driven by continued regulatory challenges, and $113.5 million related to stannsoporfin as a result of the Company ending the development program. The 2018 impairment charges primarily related to the MNK-1411 intangible asset a result of lower than previously anticipated pricing assumptions.
Ofirmev
Since the Company's acquisition of Ofirmev in March 2014, the related completed technology intangible asset had been
amortized using the straight-line method over a useful life of eight years. As the product drew nearer to loss of exclusivity, the Company was better positioned to reliably determine the pattern in which the remaining economic benefits of the intangible asset were consumed. As a result, during the three months ended March 29, 2019, the Company concluded that the sum of the years digits method, an accelerated method of amortization, would more accurately reflect the consumption of the economic benefits over the remaining useful life of the asset.
During the three months ended June 26, 2020, due to decreased demand as a result of the deprioritization of non-critical medical treatment in the face of the COVID-19 pandemic, along with increased generic competition anticipated in the marketplace post the product's loss of exclusivity in December 2020, the Company identified a triggering event with respect to the Ofirmev intangible asset within the Specialty Brands segment and assessed the recoverability of the definite-lived asset. Additionally, the Company evaluated whether these events warranted a revision to the remaining period of amortization that previously extended to March 2022. As a result of this analysis, the Company revised the useful life to end December 25, 2020, commensurate with the final period of market exclusivity. After this change in estimate of the asset's useful life, the Company determined that the undiscounted cash flows related to the Ofirmev intangible asset were less than its net book value, which required the Company to record an impairment charge for the difference between the fair value of the Ofirmev intangible asset and its net book value.
The Company determined the fair value of the Ofirmev intangible asset using the income approach, a level three measurement technique. For purposes of determining fair value, the Company made various assumptions regarding estimated future cash flows, the discount rate and other factors in determining the fair value of the intangible asset. The Company's projections in relation to the
Ofirmev intangible asset included long-term net sales and operating income at lower than historical levels. These changes in assumptions resulted in a fair value of the Ofirmev intangible asset that was less than its net book value. Therefore, the Company recorded an impairment charge of $63.5 million. The intangible asset is fully amortized as of December 25, 2020.
Terlipressin
During September 2020, the FDA issued a Complete Response Letter ("CRL") regarding the Company's New Drug Application ("NDA") seeking approval for the investigational agent terlipressin to treat adults with hepatorenal syndrome type 1 ("HRS-1"). The CRL stated that, based on the available data, the agency cannot approve the terlipressin NDA in its current form and requires more information to support a positive risk-benefit profile for terlipressin for patients with HRS-1.
In response to receipt of the CRL, the Company had an End of Review Meeting on October 26, 2020 and a Type A Meeting on January 29, 2021 with the FDA where both parties engaged in constructive dialogue in an effort to clarify a viable path to approval and the Company expects to have clarity on this path in 2021. As the Company continues to engage with the FDA over the coming months, it will continue to assess the impact of any changes to planned revenue or earnings on the fair value of the associated in-process research and development asset of $81.0 million included within intangible assets, net on the consolidated balance sheets as of December 25, 2020 and December 27, 2019.
The Company annually tests the indefinite-lived intangible assets for impairment, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable by either a qualitative or income approach. Management relies on a number of qualitative factors when considering a potential impairment such as changes to planned revenue or earnings that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.
Intangible asset amortization expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Amortization expense
|
$
|
771.2
|
|
|
$
|
853.4
|
|
|
$
|
740.2
|
|
The estimated aggregate amortization expense on intangible assets owned by the Company is expected to be as follows:
|
|
|
|
|
|
|
|
Fiscal 2021
|
$
|
581.1
|
|
|
Fiscal 2022
|
581.1
|
|
Fiscal 2023
|
581.1
|
|
Fiscal 2024
|
581.1
|
|
Fiscal 2025
|
579.6
|
The commencement of the Chapter 11 Cases above constituted an event of default under certain of the Company’s debt agreements. Accordingly, all debt not reclassified as LSTC with original long-term stated maturities was classified as current on the consolidated balance sheet as of December 25, 2020. However, any efforts to enforce payment obligations under the debt instruments are automatically stayed as a result of the Chapter 11 Cases and the creditors’ rights in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code. See Note 2 for further information.
Debt was comprised of the following at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
December 27, 2019
|
|
|
Principal
|
|
Unamortized Discount and Debt Issuance Costs (1)
|
|
Principal
|
|
Unamortized Discount and Debt Issuance Costs
|
|
Secured debt:
|
|
|
|
|
|
|
|
|
Term loan due September 2024
|
$
|
1,505.2
|
|
|
$
|
12.3
|
|
|
$
|
1,520.8
|
|
|
$
|
15.7
|
|
|
Term loan due February 2025
|
399.5
|
|
|
5.0
|
|
|
403.6
|
|
|
6.2
|
|
|
10.00% first lien senior notes due April 2025
|
495.0
|
|
|
7.7
|
|
|
—
|
|
|
—
|
|
|
10.00% second lien senior notes due April 2025
|
322.9
|
|
|
8.0
|
|
322.9
|
|
|
9.9
|
|
|
Revolving credit facility
|
900.0
|
|
|
1.7
|
|
900.0
|
|
|
3.1
|
|
|
Total secured debt
|
3,622.6
|
|
|
34.7
|
|
|
3,147.3
|
|
|
34.9
|
|
|
Unsecured debt:
|
|
|
|
|
|
|
|
|
4.875% senior notes due April 2020
|
—
|
|
|
—
|
|
|
614.8
|
|
|
0.6
|
|
|
9.50% debentures due May 2022
|
10.4
|
|
|
—
|
|
|
10.4
|
|
|
—
|
|
|
5.75% senior notes due August 2022
|
610.3
|
|
|
—
|
|
|
610.3
|
|
|
3.7
|
|
|
8.00% debentures due March 2023
|
4.4
|
|
|
—
|
|
|
4.4
|
|
|
—
|
|
|
4.75% senior notes due April 2023
|
133.7
|
|
|
—
|
|
|
133.7
|
|
|
0.8
|
|
|
5.625% senior notes due October 2023
|
514.7
|
|
|
—
|
|
|
514.7
|
|
|
4.4
|
|
|
5.50% senior notes due April 2025
|
387.2
|
|
|
—
|
|
|
387.2
|
|
|
3.6
|
|
|
Total unsecured debt:
|
1,660.7
|
|
|
—
|
|
|
2,275.5
|
|
|
13.1
|
|
|
Total debt, prior to reclassification to liabilities subject to compromise
|
5,283.3
|
|
|
34.7
|
|
|
5,422.8
|
|
|
48.0
|
|
|
Less: Current portion
|
(3,622.6)
|
|
|
(34.7)
|
|
|
(634.5)
|
|
|
(0.9)
|
|
|
Less: Amounts reclassified to liabilities subject to compromise (2)
|
(1,660.7)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total long-term debt, net of current portion
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,788.3
|
|
|
$
|
47.1
|
|
(1)As a result of the Company's Chapter 11 Cases, the Company expensed $10.2 million of unamortized discount and debt issuance costs, net, recorded in reorganization items, net in the consolidated statement of operations for fiscal 2020.
(2)In connection with the Company’s Chapter 11 Cases, $1,660.7 million outstanding unsecured debt instruments have been reclassified to LSTC in the Company's consolidated balance sheet as of December 25, 2020. Up to the Petition Date, the Company continued to accrue interest expense in relation to these debt instruments reclassified to LSTC.
Mallinckrodt International Finance S.A. ("MIFSA") is a wholly owned subsidiary of the Company. MIFSA functions as a holding company, established to own, directly or indirectly, substantially all of the operating subsidiaries of the Company, as well as to issue debt securities and to perform treasury operations.
In April 2013, MIFSA issued a $600.0 million aggregate principal amount of 4.75% senior unsecured notes due April 2023 ("the April 2023 Notes"). Mallinckrodt plc has fully and unconditionally guaranteed the April 2023 Notes on an unsecured and unsubordinated basis. The April 2023 Notes are subject to an indenture which contains covenants limiting the ability of MIFSA, its restricted subsidiaries (as defined in the April 2023 Notes) and Mallinckrodt plc, as guarantor, to incur certain liens or enter into sale and lease-back transactions. It also restricts Mallinckrodt plc and MIFSA's ability to merge or consolidate with any other person or sell or convey all or substantially all of their assets to any one person. MIFSA may redeem all of the April 2023 Notes at any time, and some of the April 2023 Notes from time to time, at a redemption price equal to the principal amount of the April 2023 Notes redeemed plus a make-whole premium. The Company pays interest on the April 2023 Notes semiannually in arrears on April 15th and October 15th of each year, which commenced on October 15, 2013.
In August 2014, MIFSA and Mallinckrodt CB LLC ("MCB") ("the Issuers") issued $900.0 million aggregate principal amount of 5.75% senior unsecured notes due August 2022 ("the 2022 Notes”). The 2022 Notes are guaranteed by Mallinckrodt plc and each of its subsidiaries that guarantee the obligations under the Senior Secured Credit Facilities (as defined below). The 2022 Notes are subject to an indenture that contains certain customary covenants and events of default (subject in certain cases to customary grace and cure periods). The occurrence of an event of default under the indenture could result in the acceleration of the 2022 Notes and could cause a cross-default that could result in the acceleration of other indebtedness of Mallinckrodt plc and its subsidiaries. The Issuers may redeem some or all of the 2022 Notes at specified redemption prices. The Issuers are obligated to offer to repurchase the 2022
Notes at a price of (a) 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events and (b) 100% of their principal amount plus accrued and unpaid interest of net proceeds from certain asset sales. These obligations are subject to certain qualifications and exceptions. The Company pays interest on the 2022 Notes semiannually in arrears on February 1st and August 1st of each year, which commenced on February 1, 2015.
In April 2015, in connection with the Company's acquisition of Ikaria, Inc. ("Ikaria"), MIFSA and MCB issued $700.0 million aggregate principal amount of 4.875% senior unsecured notes due April 2020 ("the 2020 Notes") and $700.0 million aggregate principal amount of 5.50% senior unsecured notes due April 2025 ("the 2025 Notes", and together with the 2020 Notes, the "Ikaria Notes"). The Ikaria Notes are guaranteed by Mallinckrodt plc and each of its subsidiaries that guarantee the obligations under the Senior Secured Credit Facilities (as defined below), which following the acquisition of Ikaria includes Compound Holdings II, Inc. (or its successors) and its U.S. subsidiaries. The Ikaria Notes are subject to an indenture that contains certain customary covenants and events of default (subject in certain cases to customary grace and cure periods). The occurrence of an event of default under the indenture could result in the acceleration of the Ikaria Notes and could cause a cross-default that could result in the acceleration of other indebtedness of the Company. The Issuers may redeem some or all of the 2025 Notes prior to April 15, 2020 by paying a “make-whole” premium. The Issuers may redeem some or all of the (i) 2020 Notes and (ii) 2025 Notes on or after April 15, 2020, in each case, at specified redemption prices. The Issuers are obligated to offer to repurchase the Ikaria Notes (a) at a price of 101% of their respective principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events and (b) at a price of 100% of their respective principal amount plus accrued and unpaid interest of net proceeds from certain asset sales. These obligations are subject to certain qualifications and exceptions. The Company pays interest on the Ikaria Notes semiannually on April 15th and October 15th of each year, which commenced on October 15, 2015.
In September 2015, in connection with the Company's acquisition of Therakos, Inc. ("Therakos"), MIFSA and MCB issued $750.0 million aggregate principal amount of 5.625% senior unsecured notes due October 2023 (the “October 2023 Notes”). The October 2023 Notes are guaranteed by Mallinckrodt plc and each of its subsidiaries under the Senior Secured Credit Facilities (as defined below), which following the acquisition of Therakos, includes TGG Medical Solutions, Inc. (or its successors) and its U.S. subsidiaries. The October 2023 Notes are subject to an indenture that contains certain customary covenants and events of default (subject in certain cases to customary grace and cure periods). The occurrence of an event of default under the indenture could result in the acceleration of the October 2023 Notes and could cause a cross-default that could result in the acceleration of other indebtedness of the Company. The issuers may call some or all of the October 2023 Notes at specified redemption prices. The issuers may also redeem all, but not less than all, of the October 2023 Notes at any time at a price of 100% of their principal amount, plus accrued and unpaid interest, if any, in the event the issuers become obligated to pay additional amounts as a result of changes affecting certain withholding tax laws applicable to payments on the October 2023 Notes. The Issuers are obligated to offer to repurchase the October 2023 Notes (a) at a price of 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events and (b) at a price of 100% of their principal amount plus accrued and unpaid interest of net proceeds from certain asset sales. These obligations are subject to certain qualifications and exceptions. The Company pays interest on the October 2023 Notes semiannually on April 15th and October 15th of each year, which commenced on April 15, 2016.
In February 2017, MIFSA and MCB refinanced certain then-outstanding outstanding term loans. The refinanced term loan had an initial aggregate principal amount of $1,865.0 million, is due September 2024 and, pursuant to its terms, bears interest at a per annum rate equal to LIBOR plus 2.75%, subject to certain adjustments (the "2017 Term Loan"). The 2017 Term Loan requires quarterly principal amortization payments in an amount equal to 0.25% of the original principal balance of the 2017 Term Loan, which may be reduced by making optional prepayments. The quarterly principal amortization is payable on the last day of each calendar quarter, which commenced on June 30, 2017, with the remaining balance due September 2024.
In conjunction with the term loan refinancing, MIFSA and MCB entered into a $900.0 million revolving credit facility that matures on February 28, 2022 (the "Revolving Credit Facility"), replacing, and increasing the commitments under, an existing revolving credit facility. The Revolving Credit Facility bears interest at a per annum rate equal to LIBOR plus 2.25% and contains a $50.0 million letter of credit provision, of which none had been issued as of December 25, 2020. Unused commitments on the Revolving Credit Facility are subject to an annual commitment fee, which was 0.275% as of December 25, 2020, and the fee applied to outstanding letters of credit is based on the interest rate applied to borrowings. The Revolving Credit Facility added certain wholly owned subsidiaries of the Company as borrowers, in addition to MIFSA and MCB.
In July 2017, Mallinckrodt Securitization S.à r.l. ("Mallinckrodt Securitization"), a wholly owned special purpose subsidiary of the Company, entered into a $250.0 million accounts receivable securitization facility ("the Receivable Securitization") with PNC Bank, National Association, as administrative agent, and Mallinckrodt LLC, a wholly owned subsidiary of the Company, as initial servicer (the "Servicer"). Loans under the Receivable Securitization bore interest (including facility fees) at a rate equal to one month LIBOR rate plus a margin of 0.90%. In July 2019, the Company repaid all $200.0 million of then-outstanding obligations under the Receivables Securitization. Upon payment in full of such outstanding obligations under the Receivable Securitization, the $250.0 million receivables securitization program was automatically terminated (including (i) the Receivable Securitization, (ii) the Amended and Restated Purchase and Sale Agreement, dated as of July 28, 2017 (as amended, the "Purchase and Sale Agreement"), among certain wholly owned subsidiaries of the Company, the Servicer, and Mallinckrodt Securitization, (iii) the Sale Agreements (together, the "Sale Agreements"), between Mallinckrodt LLC and certain subsidiaries of the Company and (iv) all agreements and documents
entered into in connection therewith, and all security interests, liens or other rights securing the receivables securitization program were automatically released and terminated. Certain indemnification and other obligations in the Receivable Securitization, the Purchase and Sale Agreement, the Sale Agreements and the documents related thereto, which by their terms expressly survive termination of such documents, will survive the termination of Mallinckrodt Securitization's receivables securitization program.
In February 2018, in connection with the Sucampo Acquisition, MIFSA and MCB issued a $600.0 million senior secured term loan due February 2025 (the "2018 Term Loan"). Pursuant to its terms, the 2018 Term Loan bears interest at a per annum rate equal to LIBOR plus 3.00%, subject to certain potential adjustments. The 2018 Term Loan requires quarterly principal amortization payments in an amount equal to 0.25% of the original principal balance of the 2018 Term Loan, which may be reduced by making optional prepayments. The quarterly principal amortization is payable on the last day of each calendar quarter, which commenced on June 30, 2018.
The 2017 Term Loan, 2018 Term Loan and Revolving Credit Facility (collectively "the Senior Secured Credit Facilities") are fully and unconditionally guaranteed by Mallinckrodt plc, certain of its direct or indirect wholly owned U.S. subsidiaries and each of its direct or indirect wholly owned subsidiaries that owns directly or indirectly any such wholly owned U.S. subsidiaries and certain of its other subsidiaries (collectively, "the Guarantors"). The Senior Secured Credit Facilities are secured by a security interest in certain assets of MIFSA, MCB and the Guarantors. The Senior Secured Credit Facilities contain customary affirmative and negative covenants, which include, among other things, restrictions on the Company's ability to declare or pay dividends, create liens, incur additional indebtedness, enter into sale and lease-back transactions, make investments, dispose of assets and merge or consolidate with any other person.
In December 2019, upon the terms and conditions set forth in a confidential offering memorandum dated November 5, 2019, the Issuers, completed private offers to exchange (the "2019 Exchange Offers") (i) $83.2 million of the 2020 Notes issued by the Issuers for $70.2 million of new 10.00% Second Lien Senior Secured Notes due April 2025 to be issued by the Issuers (the "Second Lien Notes") and (ii) $52.9 million of the 2022 Notes, $216.4 million of the April 2023 Notes, $144.7 million of the October 2023 Notes and $208.9 million of the 2025 Notes issued by the Issuers (collectively, and together with the 2020 Notes, the "Existing Notes") for $252.7 million of Second Lien Notes. The Second Lien Notes are subject to an indenture that contains customary covenants and events of default (subject in certain cases to customary grace and cure periods). The Second Lien Notes are secured by a second lien security interest in all collateral that currently secures the Senior Secured Credit Facilities, subject to certain exceptions. The Second Lien Notes are guaranteed by each entity that currently guarantees Mallinckrodt plc's senior secured notes, subject to certain exceptions. The Issuers may redeem any or all of the Second Lien Notes at any time at specified redemption prices. The Issuers are obligated to (a) offer to repurchase all of the Second Lien Notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, upon the occurrence of certain change of control events and (b) offer to repurchase Second Lien Notes with the net proceeds of certain asset sales at a price equal to 100% of their principal amount plus accrued and unpaid interest, if any. These obligations are subject to certain qualifications and exceptions.
The Company accounted for the 2019 Exchange Offers as a debt extinguishment, which resulted in the extinguishment of $383.2 million of principal of Existing Notes and the transfer of $322.9 million of Existing Notes to Second Lien Notes. The exchanges also resulted in the capitalization of $10.1 million of deferred financing fees related to the Second Lien Notes. In conjunction with the exchanges, the Company recorded a gain on debt extinguishment of $377.4 million primarily associated with retiring a portion of its Existing Notes at less than face value, net of the write-off of associated deferred financing fees of $4.9 million.
On April 7, 2020, the Company, Mallinckrodt International Finance S.A. and Mallinckrodt CB LLC (the "Exchange Issuers") entered into an exchange agreement (the “Exchange Agreement”) with certain third parties (collectively, the “Exchanging Holders”). Pursuant to the Exchange Agreement, the Exchanging Holders agreed to exchange with the Exchange Issuers, on April 7, 2020, their holdings of 2020 Notes (consisting of approximately $495.0 million aggregate principal amount of the 2020 Notes) for new 10.00% First Lien Senior Secured Notes due 2025 issued by the Exchange Issuers (the “First Lien Notes”), at a rate of $1,000 of First Lien Notes for every $1,000 of 2020 Notes exchanged (such exchange, the “Exchange”). The Exchange Issuers and Exchanging Holders consummated the Exchange on April 7, 2020.
The First Lien Notes are subject to an indenture that contains customary covenants and events of default (subject in certain cases to customary grace and cure periods). The First Lien Notes are secured by a first lien security interest in all collateral that currently secures the Senior Secured Credit Facilities, subject to certain exceptions. The First Lien Notes are guaranteed by each entity that currently guarantees the Senior Secured Credit Facilities, subject to certain exceptions. The Issuers may redeem any or all of the First Lien Notes at any time at specified redemption prices. The Issuers are obligated to (a) offer to repurchase all of the First Lien Notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, upon the occurrence of certain change of control events and (b) offer to repurchase First Lien Notes with the net proceeds of certain asset sales at a price equal to 100% of their principal amount plus accrued and unpaid interest, if any. These obligations are subject to certain qualifications and exceptions.
On April 15, 2020, the Company paid in full the remaining approximately $119.8 million in principal amount of outstanding 2020 Notes at the maturity thereof with cash on hand.
As of December 25, 2020, the applicable interest rate and outstanding borrowings on the Company's variable-rate debt instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable interest rate (1)
|
|
Outstanding borrowings
|
|
Term loan due September 2024
|
5.50
|
%
|
|
$
|
1,505.2
|
|
|
Term loan due February 2025
|
5.75
|
|
|
399.5
|
|
|
Revolving credit facility
|
4.47
|
|
|
900.0
|
|
(1)Includes the incremental 200 basis points related to the cash adequate protection payments. Refer Note 2 for further information.
The commencement of the Chapter 11 Cases on October 12, 2020 constituted an event of default under certain of the Company's debt agreements. Accordingly, all long-term debt not subject to compromise was classified as current on the consolidated balance sheet as of December 25, 2020. The Company's stated long-term debt principal maturity amounts as of December 25, 2020 are as follows:
|
|
|
|
|
|
|
|
Fiscal 2021
|
$
|
24.6
|
|
|
Fiscal 2022
|
1,540.4
|
|
|
Fiscal 2023
|
672.5
|
|
|
Fiscal 2024
|
1,457.6
|
|
|
Fiscal 2025
|
1,588.2
|
|
Defined Benefit Plans
The Company sponsors a number of defined benefit retirement plans covering certain of its U.S. employees and non-U.S. employees. As of December 25, 2020, U.S. plans represented 32.8% of the Company's remaining projected benefit obligation. The Company generally does not provide postretirement benefits other than retirement plan benefits for its employees; however, certain of the Company's U.S. employees participate in postretirement benefit plans that provide medical benefits. These plans are unfunded.
On November 16, 2020, the Debtors received approval from the Bankruptcy Court to maintain foreign pension benefit plans and certain postretirement benefit plans during the pendency of the Chapter 11 Cases. As such, these obligations are not classified as LSTC on the consolidated balance sheet as of December 25, 2020. For further information refer to Note 2.
The net periodic benefit cost (credit) for the Company's pension and postretirement benefit plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
Fiscal Year
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
0.2
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
0.5
|
|
|
0.7
|
|
|
0.6
|
|
|
1.2
|
|
|
1.6
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
0.7
|
|
|
0.5
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
Amortization of prior service cost (credit)
|
0.1
|
|
|
0.2
|
|
|
0.1
|
|
|
(2.1)
|
|
|
(2.1)
|
|
|
(2.1)
|
|
|
Loss (gain) on plan settlements
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
(0.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (credit)
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
$
|
(0.9)
|
|
|
$
|
(0.5)
|
|
|
$
|
(1.2)
|
|
The following table represents the changes in benefit obligations and the net amounts recognized on the consolidated balance sheets for pension and postretirement benefit plans at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
December 25,
2020
|
|
December 27,
2019
|
|
December 25,
2020
|
|
December 27,
2019
|
|
Change in benefit obligations:
|
|
|
|
|
|
|
|
|
Projected benefit obligations at beginning of year
|
$
|
27.0
|
|
|
$
|
26.1
|
|
|
$
|
40.5
|
|
|
$
|
39.8
|
|
|
Service cost
|
0.2
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
Interest cost
|
0.5
|
|
|
0.7
|
|
|
1.2
|
|
|
1.6
|
|
|
Actuarial loss
|
1.8
|
|
|
2.3
|
|
|
1.2
|
|
|
1.7
|
|
|
Benefits and administrative expenses paid
|
(1.5)
|
|
|
(1.7)
|
|
|
(2.8)
|
|
|
(2.6)
|
|
|
Plan settlements
|
(0.1)
|
|
|
(0.2)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
1.5
|
|
|
(0.3)
|
|
|
—
|
|
|
—
|
|
|
Projected benefit obligations at end of year
|
$
|
29.4
|
|
|
$
|
27.0
|
|
|
$
|
40.1
|
|
|
$
|
40.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
December 25,
2020
|
|
December 27,
2019
|
|
December 25,
2020
|
|
December 27,
2019
|
|
Amounts recognized on the consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
0.8
|
|
|
$
|
1.8
|
|
|
$
|
1.9
|
|
|
$
|
3.3
|
|
|
Non-current liabilities
|
18.9
|
|
|
25.2
|
|
|
15.5
|
|
|
37.2
|
|
|
Liabilities subject to compromise
|
9.7
|
|
|
—
|
|
|
22.7
|
|
|
—
|
|
|
Net amount recognized on the consolidated balance sheet
|
$
|
29.4
|
|
|
$
|
27.0
|
|
|
$
|
40.1
|
|
|
$
|
40.5
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
$
|
(11.8)
|
|
|
$
|
(10.1)
|
|
|
$
|
(2.0)
|
|
|
$
|
(0.8)
|
|
|
Prior service (cost) credit
|
(0.1)
|
|
|
(0.2)
|
|
|
3.8
|
|
|
5.9
|
|
|
Net amount recognized in accumulated other comprehensive loss
|
$
|
(11.9)
|
|
|
$
|
(10.3)
|
|
|
$
|
1.8
|
|
|
$
|
5.1
|
|
The estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit cost (credit) in fiscal 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
Amortization of net actuarial loss
|
$
|
0.9
|
|
|
$
|
0.2
|
|
|
Amortization of prior service cost (credit)
|
0.1
|
|
|
(2.1)
|
|
Actuarial Assumptions
Weighted-average assumptions used each period to determine net periodic benefit cost for the Company's pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
|
Fiscal Year
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Discount rate
|
2.8
|
%
|
|
4.0
|
%
|
|
3.3
|
%
|
|
1.3
|
%
|
|
2.0
|
%
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
2.5
|
%
|
|
2.5
|
%
|
|
2.5
|
%
|
Weighted-average assumptions used each period to determine benefit obligations for the Company's pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
|
Fiscal Year
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Discount rate
|
1.8
|
%
|
|
2.8
|
%
|
|
4.0
|
%
|
|
1.0
|
%
|
|
1.3
|
%
|
|
2.0
|
%
|
|
Rate of compensation increase
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
2.5
|
%
|
|
2.5
|
%
|
|
2.5
|
%
|
For the Company's unfunded U.S. plans, the discount rate is based on the market rate for a broad population of AA-rated (Moody's Investor Services, Inc. or Standard & Poor's Corporation) corporate bonds over $250.0 million. For the Company's U.S. plans that were funded in prior periods, the discount rate was based on the estimated final settlement discount rates based on quotes received from a group of well-rated insurance carriers who are active in the single premium group annuity marketplace. The group of insurance carriers are rated A or better by AM best.
The weighted-average discount rate used to determine net periodic benefit credit and obligations for the Company's postretirement benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Net periodic benefit credit
|
3.0
|
%
|
|
4.1
|
%
|
|
3.4
|
%
|
|
Benefit obligations
|
2.0
|
%
|
|
3.0
|
%
|
|
4.1
|
%
|
Healthcare cost trend assumptions for postretirement benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25,
2020
|
|
December 27,
2019
|
|
Healthcare cost trend rate assumed for next fiscal year
|
5.8
|
%
|
|
5.8
|
%
|
|
Rate to which the cost trend rate is assumed to decline
|
4.5
|
%
|
|
4.5
|
%
|
|
Fiscal year the ultimate trend rate is achieved
|
2038
|
|
2038
|
Contributions
The Company's funding policy is to make contributions in accordance with the laws and customs of the various countries in which the Company operates, as well as to make discretionary voluntary contributions from time to time. In fiscal 2020 and 2019, the Company made $1.6 million and $1.9 million in contributions, respectively, to the Company's pension plans.
Expected Future Benefit Payments
Benefit payments expected to be paid, reflecting future expected service as appropriate, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
Fiscal 2021
|
$
|
2.0
|
|
|
$
|
3.4
|
|
|
Fiscal 2022
|
1.7
|
|
|
3.0
|
|
|
Fiscal 2023
|
1.7
|
|
|
2.9
|
|
|
Fiscal 2024
|
1.7
|
|
|
2.8
|
|
|
Fiscal 2025
|
1.6
|
|
|
2.7
|
|
|
Fiscal 2026 - 2030
|
7.3
|
|
|
11.8
|
|
Defined Contribution Retirement Plans
The Company maintains one active tax-qualified 401(k) retirement plan and one active non-qualified deferred compensation plan in the U.S. The 401(k) retirement plan provides for an automatic Company contribution of 3% of an eligible employee's pay, with an additional Company matching contribution generally equal to 50.0% of each employee's elective contribution to the plan up to 8% of the employee's eligible pay. The deferred compensation plan permits eligible employees to defer a portion of their compensation. Total defined contribution expense related to continuing operations was $26.0 million, $21.9 million and $25.3 million for fiscal 2020, 2019 and 2018, respectively.
Rabbi Trusts and Other Investments
The Company maintains several rabbi trusts, the assets of which are used to pay retirement benefits. The rabbi trust assets are subject to the claims of the Company's creditors in the event of the Company's insolvency. Plan participants are general creditors of the Company with respect to these benefits. The trusts primarily hold life insurance policies and debt and equity securities, the value of which is included in other assets on the consolidated balance sheets. Note 21 provides additional information regarding the debt and equity securities. During fiscal 2019, a portion of these policies were liquidated. The carrying value of the 61 and 62 life insurance contracts held by these trusts was $45.0 million and $43.8 million as of December 25, 2020 and December 27, 2019, respectively. These contracts had a total death benefit of $92.7 million and $94.0 million as of December 25, 2020 and December 27, 2019, respectively. However, there are outstanding loans against the policies amounting to $23.2 million and $23.6 million as of December 25, 2020 and December 27, 2019, respectively.
The Company has insurance contracts that serve as collateral for certain of the Company's non-U.S. pension plan benefits. These insurance contracts totaled $7.3 million as of both December 25, 2020 and December 27, 2019, respectively. These amounts were included in other assets on the consolidated balance sheets.
Preferred Shares
Mallinckrodt is authorized to issue 500,000,000 preferred shares, par value of $0.20 per share, none of which were issued or outstanding at December 25, 2020. Rights as to dividends, return of capital, redemption, conversion, voting and otherwise with respect to these shares may be determined by Mallinckrodt's Board of Directors on or before the time of issuance. In the event of the liquidation of the Company, the holders of any preferred shares then outstanding would, if issued on such terms that they carry a preferential distribution entitlement on liquidation, be entitled to payment to them of the amount for which the preferred shares were subscribed and any unpaid dividends prior to any payment to the ordinary shareholders.
Share Repurchases
From time to time, the Company's Board of Directors have authorized share repurchase programs. The details of the March 2017 Repurchase Program, which has no time limit or expiration date is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Amount
|
|
Authorized repurchase amount
|
|
|
$
|
1,000.0
|
|
|
Repurchases:
|
|
|
|
|
Fiscal 2017
|
13,490,448
|
|
|
380.6
|
|
|
Fiscal 2018
|
3,610,968
|
|
|
55.2
|
|
|
Fiscal 2019
|
—
|
|
|
—
|
|
|
Fiscal 2020
|
—
|
|
|
—
|
|
|
Remaining amount available
|
|
|
$
|
564.2
|
|
The Company also repurchases shares from certain employees in order to satisfy employee tax withholding requirements in connection with the vesting of restricted shares. In addition, the Company repurchases shares to settle certain option exercises. The Company spent $0.4 million, $2.6 million and zero to acquire shares in connection with equity-based awards in fiscal 2020, 2019 and 2018, respectively.
Total share-based compensation cost was $25.3 million, $33.8 million and $34.6 million for fiscal 2020, 2019 and 2018, respectively. These amounts are generally included within SG&A expenses in the consolidated statements of operations. The Company recognized a related tax benefit associated with this expense of zero, $1.2 million and zero in fiscal 2020, 2019 and 2018, respectively.
Stock Compensation Plans
Over the years, the Company has adopted and amended its Mallinckrodt Pharmaceuticals Stock and Incentive Plan, which provides for the award of share options, share appreciation rights, annual performance bonuses, long-term performance awards,
restricted units, restricted shares, deferred share units, promissory shares and other share-based awards (collectively, "Awards"). The maximum number of common shares to be issued as Awards, subject to adjustment as provided under the terms of the respective plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number of Common Shares to be Issued as Awards (in millions)
|
|
2013 Plan
|
|
5.7
|
|
|
2015 Plan
|
|
17.8
|
|
|
2018 Plan
|
|
26.8
|
|
As of December 25, 2020, all equity awards held by the Company's employees were converted from equity awards issued by Questcor, acquired during fiscal 2014, or granted under the aforementioned plans.
Share options. Share options are granted to purchase the Company's ordinary shares at prices that are equal to the fair market value of the shares on the date the share option is granted. Share options generally vest in equal annual installments over a period of four years and expire ten years after the date of grant. The grant-date fair value of share options, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. Forfeitures are estimated based on historical experience.
Share option activity and information was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Options
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term
(in years)
|
|
Aggregate Intrinsic Value
|
|
Outstanding as of December 29, 2017
|
4,643,984
|
|
|
$
|
57.78
|
|
|
|
|
|
|
Granted
|
3,159,521
|
|
|
13.92
|
|
|
|
|
|
|
Exercised
|
(39,949)
|
|
|
32.00
|
|
|
|
|
|
|
Expired/Forfeited
|
(756,505)
|
|
|
52.63
|
|
|
|
|
|
|
Outstanding as of December 28, 2018
|
7,007,051
|
|
|
38.74
|
|
|
|
|
|
|
Granted
|
1,378,175
|
|
|
22.09
|
|
|
|
|
|
|
Exercised
|
(45,324)
|
|
|
20.67
|
|
|
|
|
|
|
Expired/Forfeited
|
(1,449,202)
|
|
|
34.80
|
|
|
|
|
|
|
Outstanding as of December 27, 2019
|
6,890,700
|
|
|
36.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
(820,988)
|
|
|
39.65
|
|
|
|
|
|
|
Outstanding as of December 25, 2020
|
6,069,712
|
|
|
35.95
|
|
|
2.7
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Vested and non-vested expected to vest as of December 25, 2020
|
5,660,657
|
|
|
36.11
|
|
|
6.3
|
|
$
|
—
|
|
|
Exercisable as of December 25, 2020
|
3,923,668
|
|
|
43.22
|
|
|
3.1
|
|
—
|
|
As of December 25, 2020, there was $8.3 million of total unrecognized compensation cost related to non-vested share option awards, which is expected to be recognized over a weighted-average period of 1.8 years.
The grant-date fair value of share options has been estimated using the Black-Scholes pricing model. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. The expected volatility assumption is based on the historical and implied volatility of the Company's peer group with similar business models. The expected life assumption is based on the contractual and vesting term of the share option, employee exercise patterns and employee post-vesting termination behavior. The expected annual dividend per share is based on the Company's current intentions regarding payment of cash dividends. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The weighted-average assumptions used in the Black-Scholes pricing model for shares granted in fiscal 2019 and 2018, along with the weighted-average grant-date fair value, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2019
|
|
2018
|
|
Expected share price volatility
|
|
|
45.8
|
%
|
|
38.2
|
%
|
|
Risk-free interest rate
|
|
|
2.2
|
%
|
|
2.6
|
%
|
|
Expected annual dividend per share
|
|
|
—
|
%
|
|
—
|
%
|
|
Expected life of options (in years)
|
|
|
5.3
|
|
5.3
|
|
Fair value per option
|
|
|
$
|
9.66
|
|
|
$
|
5.32
|
|
In fiscal 2019 and 2018, the total intrinsic value of options exercised was $0.3 million and $0.2 million, respectively, and the related tax benefit was $0.1 million for both periods, respectively.
Restricted share units. Recipients of restricted share units ("RSUs") have no voting rights and receive dividend equivalent units that vest upon the vesting of the related shares. RSUs generally vest in equal annual installments over a period of four years. Restrictions on RSUs lapse upon normal retirement, death or disability of the employee. The grant-date fair value of RSUs, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the service period. The fair market value of RSUs granted is determined based on the market value of the Company's shares on the date of grant.
RSU activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Non-vested as of December 29, 2017
|
1,105,766
|
|
|
$
|
60.08
|
|
|
Granted
|
1,222,568
|
|
|
14.58
|
|
|
Exercised
|
(433,354)
|
|
|
57.93
|
|
|
Expired/Forfeited
|
(209,879)
|
|
|
44.38
|
|
|
Non-vested as of December 28, 2018
|
1,685,101
|
|
|
29.54
|
|
|
Granted
|
755,180
|
|
|
20.13
|
|
|
Exercised
|
(713,274)
|
|
|
35.29
|
|
|
Expired/Forfeited
|
(307,987)
|
|
|
24.81
|
|
|
Non-vested as of December 27, 2019
|
1,419,020
|
|
|
22.68
|
|
|
|
|
|
|
|
Exercised
|
(647,167)
|
|
|
24.23
|
|
|
Expired/Forfeited
|
(281,182)
|
|
|
22.11
|
|
|
Non-vested as of December 25, 2020
|
490,671
|
|
|
20.96
|
|
The total vest date fair value of Mallinckrodt RSUs vested during fiscal 2020 was $15.7 million. As of December 25, 2020, there was $6.4 million of total unrecognized compensation cost related to non-vested RSUs granted, which is expected to be recognized over a weighted-average period of 1.9 years.
Performance share units. Similar to recipients of RSUs, recipients of performance share units ("PSUs") have no voting rights and receive dividend equivalent units. The grant-date fair value of PSUs, adjusted for estimated forfeitures, is generally recognized as expense on a straight-line basis from the grant-date through the end of the performance period. The vesting of PSUs and related dividend equivalent units is generally based on various performance metrics and relative total shareholder return (total shareholder return for the Company as compared to total shareholder return of the PSU peer group), measured over a three year performance period. The PSU peer group is comprised of various healthcare companies which attempts to replicate the Company's mix of businesses. Depending on Mallinckrodt's relative performance during the performance period, a recipient of the award is entitled to receive a number of ordinary shares equal to a percentage, ranging from 0.0% to 200.0%, of the award granted.
During December 2020, all outstanding PSUs were cancelled by the Human Resources and Compensation Committee of the Company's Board of Directors.
PSU activity was as follows (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Non-vested as of December 29, 2017
|
504,451
|
|
|
$
|
64.44
|
|
|
Granted
|
770,714
|
|
|
13.80
|
|
|
Forfeited
|
(89,614)
|
|
|
59.18
|
|
|
Vested
|
(24,022)
|
|
|
98.27
|
|
|
Non-vested as of December 28, 2018
|
1,161,529
|
|
|
28.61
|
|
|
Granted
|
448,363
|
|
|
32.46
|
|
|
Forfeited
|
(414,387)
|
|
|
30.54
|
|
|
|
|
|
|
|
Non-vested as of December 27, 2019
|
1,195,505
|
|
|
23.85
|
|
|
|
|
|
|
|
Forfeited
|
(1,195,505)
|
|
|
23.85
|
|
|
|
|
|
|
|
Non-vested as of December 25, 2020
|
—
|
|
|
—
|
|
(1) The number of shares disclosed within this table are at the target number of 100.0%.
The Company generally uses the Monte Carlo model to estimate the probability of satisfying the performance criteria and the resulting fair value of PSU awards. The assumptions used in the Monte Carlo model for PSUs granted during each year were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2019
|
|
2018
|
|
Expected stock price volatility
|
|
|
55.2
|
%
|
|
56.9
|
%
|
|
Peer group stock price volatility
|
|
|
41.3
|
%
|
|
39.1
|
%
|
|
Correlation of returns
|
|
|
47.8
|
%
|
|
2.1
|
%
|
Employee Stock Purchase Plans
Effective March 16, 2016, upon approval by the shareholders of Mallinckrodt, the Company adopted a new qualified Mallinckrodt Employee Stock Purchase Plan ("ESPP"). Substantially all full-time employees of the Company's U.S. subsidiaries and employees of certain qualified non-U.S. subsidiaries are eligible to participate in the ESPP. Eligible employees authorize payroll deductions to be made to purchase shares at 15.0% below the market price at the beginning or end of an offering period. Employees are eligible to authorize withholdings such that purchases of shares may amount to $25,000 of fair market value for each calendar year as prescribed by the IRC Section 423. Mallinckrodt has elected to deliver shares by utilizing treasury stock accumulated by the Company. The ESPP was suspended effective June 30, 2019 and remains unavailable as of December 25, 2020.
In disposing of assets or businesses, the Company has from time to time provided representations, warranties and indemnities to cover various risks and liabilities, including unknown damage to assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities related to periods prior to disposition. The Company assesses the probability of potential liabilities related to such representations, warranties and indemnities and adjusts potential liabilities as a result of changes in facts and circumstances. The Company believes, given the information currently available, that the ultimate resolutions will not have a material adverse effect on its financial condition, results of operations and cash flows.
In connection with the sale of the Specialty Chemical business (formerly known as Mallinckrodt Baker) in fiscal 2010, the Company agreed to indemnify the purchaser with respect to various matters, including certain environmental, health, safety, tax and other matters. The indemnification obligations relating to certain environmental, health and safety matters have a term of 17 years from the sale, while some of the other indemnification obligations have an indefinite term. The amount of the liability relating to all of these indemnification obligations included in LSTC and other liabilities on the Company's consolidated balance sheets as of December 25, 2020 and December 27, 2019, respectively, was $15.4 million and $15.0 million, respectively, of which $12.7 million and $12.3 million, respectively, related to environmental, health and safety matters. The value of the environmental, health and safety indemnity was measured based on the probability-weighted present value of the costs expected to be incurred to address environmental, health and safety claims made under the indemnity. The aggregate fair value of these indemnification obligations did not differ significantly from their aggregate carrying value as of December 25, 2020 and December 27, 2019. As of December 25, 2020, the maximum future payments the Company could be required to make under these indemnification obligations was $70.2 million. The Company was required to pay $30.0 million into an escrow account as collateral to the purchaser, of which $19.0 million
and $18.9 million remained in restricted cash, included in other long-term assets on the consolidated balance sheets as of December 25, 2020 and December 27, 2019, respectively.
The Company has recorded liabilities for known indemnification obligations included as part of environmental liabilities, which are discussed in Note 20.
The Company is also liable for product performance; however the Company believes, given the information currently available, that the ultimate resolution of any such claims will not have a material adverse effect on its financial condition, results of operations and cash flows.
As of December 25, 2020, the Company had various other letters of credit, guarantees and surety bonds totaling $31.7 million and restricted cash of $37.4 million held in segregated accounts primarily to collateralize surety bonds for the Company's environmental liabilities.
|
|
|
|
|
|
|
|
20.
|
Commitments and Contingencies
|
The Company has purchase obligations related to commitments to purchase certain goods and services. As of December 25, 2020, such obligations were as follows:
|
|
|
|
|
|
|
|
Fiscal 2021
|
$
|
4.7
|
|
|
Fiscal 2022
|
2.1
|
|
|
Fiscal 2023
|
2.1
|
|
|
Fiscal 2024
|
2.1
|
|
|
Fiscal 2025
|
2.1
|
|
The Company is subject to various legal proceedings and claims, including government investigations, environmental matters, product liability matters, patent infringement claims, personal injury, employment disputes, contractual disputes and other commercial disputes, including those described below. Although it is not feasible to predict the outcome of these matters, the Company believes, unless otherwise indicated below, given the information currently available, that their ultimate resolution will not have a material adverse effect on its financial condition, results of operations and cash flows.
On October 12, the Company announced that Mallinckrodt plc and certain of its subsidiaries voluntarily initiated the Chapter 11 Cases under the Bankruptcy Code in the Bankruptcy Court. As a result of initiating the Chapter 11 Cases, all litigation and proceedings against the Company have been automatically stayed, subject to certain limited exceptions. In addition, the Bankruptcy Court issued orders enjoining certain litigation against the Company and various individuals named in certain of the litigation described below that might otherwise be subject to such an exception. For further information about the Chapter 11 Cases, refer to Note 2.
Governmental Proceedings
Opioid-Related Matters
Since 2017, multiple U.S. states, counties, a territory, other governmental persons or entities and private plaintiffs have filed lawsuits against certain entities of the Company, as well as various other manufacturers, distributors, pharmacies, pharmacy benefit managers, individual doctors and/or others, asserting claims relating to defendants' alleged sales, marketing, distribution, reimbursement, prescribing, dispensing and/or other practices with respect to prescription opioid medications, including certain of the Company's products. As of March 10, 2021, the cases the Company is aware of include, but are not limited to, approximately 2,614 cases filed by counties, cities, Native American tribes and/or other government-related persons or entities; approximately 270 cases filed by hospitals, health systems, unions, health and welfare funds or other third-party payers; approximately 124 cases filed by individuals; approximately six cases filed by schools and school boards; and 17 cases filed by the Attorneys General for New Mexico, Kentucky, Rhode Island, Georgia, Florida, Alaska, New York, Nevada, South Dakota, New Hampshire, Louisiana, Illinois, Mississippi, West Virginia, Puerto Rico, Ohio, and Idaho, with Idaho being the only state Attorney General to file in federal as opposed to state court. As of March 10, 2021, the Mallinckrodt defendants in these cases consist of Mallinckrodt plc and the following subsidiaries of Mallinckrodt plc: Mallinckrodt Enterprises LLC, Mallinckrodt LLC, SpecGx LLC, Mallinckrodt Brand Pharmaceuticals Inc., Mallinckrodt Inc., MNK 2011 Inc., and Mallinckrodt Enterprises Holdings, Inc. Certain of the lawsuits have been filed as putative class actions. On October 8, 2020, the State of Rhode Island filed a lawsuit against the Company's President and Chief Executive Officer ("CEO"), Mark C. Trudeau, asserting similar claims relating to the marketing and distribution of prescription opioid medications. Rhode Island has voluntarily agreed to a stay of the lawsuit against Mr. Trudeau.
Most pending federal lawsuits have been coordinated in a federal multi-district litigation (“MDL”) pending in the U.S. District Court for the Northern District of Ohio. The MDL court has issued a series of case management orders permitting motion practice addressing threshold legal issues in certain cases, allowing discovery, setting pre-trial deadlines and setting a trial date on October 21, 2019 for two cases originally filed in the Northern District of Ohio by Summit County and Cuyahoga County against opioid manufacturers, distributors, and pharmacies ("Track 1 Cases"). The counties claimed that opioid manufacturers' marketing activities changed the medical standard of care for treating both chronic and acute pain, which led to increases in the sales of their prescription opioid products. They also alleged that opioid manufacturers' and distributors' failure to maintain effective controls against diversion was a substantial cause of the opioid crisis. On September 30, 2019, the Company announced that Mallinckrodt plc, along with its wholly owned subsidiaries Mallinckrodt LLC and SpecGx LLC, had executed a definitive settlement agreement and release with Cuyahoga and Summit Counties in Ohio. The settlement fully resolves the Track 1 cases against all named Mallinckrodt entities that were scheduled to go to trial in October 2019 in the MDL. Under the agreement, the Company paid $24.0 million in cash on October 1, 2019. In addition, the Company will provide $6.0 million in generic products, including addiction treatment products, and will also provide a $0.5 million payment in two years in recognition of the counties' time and expenses. Further in the event of a comprehensive resolution of government-related opioid claims, the Company has agreed that the two plaintiff counties will receive the value they would have received under such a resolution, less the payments described above. All named Mallinckrodt entities were dismissed with prejudice from the lawsuit. The value of the settlement should not be extrapolated to any other opioid-related cases or claims.
Other lawsuits remain pending in various state courts. In some jurisdictions, certain of the state lawsuits have been consolidated or coordinated for pre-trial proceedings before a single court within their respective state court systems.
The lawsuits assert a variety of claims, including, but not limited to, public nuisance, negligence, civil conspiracy, fraud, violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) or similar state laws, violations of state Controlled Substances Acts or state False Claims Acts, product liability, consumer fraud, unfair or deceptive trade practices, false advertising, insurance fraud, unjust enrichment, negligence, negligent misrepresentation, and other common law and statutory claims arising from defendants' manufacturing, distribution, marketing and promotion of opioids and seek restitution, damages, injunctive and other relief and attorneys' fees and costs. The claims generally are based on alleged misrepresentations and/or omissions in connection with the sale and marketing of prescription opioid medications and/or an alleged failure to take adequate steps to prevent diversion.
Opioid-Related Litigation Settlement. On February 25, 2020, the Company announced that it had reached an agreement in principle with a court-appointed plaintiffs' executive committee representing the interest of thousands of plaintiffs in the MDL and supported by a broad-based group of 48 state and U.S. Territory Attorneys General on the terms of a global settlement that would resolve all opioid-related claims against the Company and its subsidiaries (the "Opioid-Related Litigation Settlement"). The Opioid-Related Litigation Settlement contemplated the filing of voluntary petitions under Chapter 11 by the Specialty Generics Subsidiaries and the establishment of a trust for the benefit of plaintiffs holding opioid-related claims against the Company (the "Opioid Claimant Trust"). Furthermore, under the terms of the Opioid-Related Litigation Settlement, subject to court approval and other conditions, it was contemplated that, the Company would (1) make cash payments of $1,600.0 million in structured payments over eight years, beginning upon the Specialty Generics Subsidiaries’ emergence from the completed Chapter 11 case, the substantial majority of which would be expected to be contributed to the Opioid Claimant Trust and (2) issue warrants with an eight year term to the Opioid Claimant Trust exercisable at a strike price of $3.15 per share to purchase the Company’s ordinary shares that would represent approximately 19.99% of the Company's fully diluted outstanding shares, including after giving effect to the exercise of the warrants (the “Settlement Warrants”).
As a result of the Opioid-Related Litigation Settlement, the Company recorded an accrual for this contingency of $1,600.0 million related to the structured cash payments and $43.4 million related to the Settlement Warrants in the consolidated balance sheet as of December 27, 2019.
Amended Opioid-Related Litigation Settlement. In conjunction with the Company's Chapter 11 filing on October 12, 2020, the Company entered into a RSA which includes a proposed resolution of all opioid-related claims against the Company and its subsidiaries that supersedes the Opioid-Related Litigation Settlement, The RSA provides that, upon the Company’s emergence from the Chapter 11 process, subject to court approval and other conditions:
•Opioid claims would be channeled to one or more trusts, which would receive $1,600.0 million in structured payments consisting of (i) a $450.0 million payment upon the Company’s emergence from Chapter 11; (ii) a $200.0 million payment upon each of the first and second anniversaries of emergence; and (iii) a $150.0 million payment upon each of the third through seventh anniversaries of emergence with a one-year prepayment option at a discount for all but the first payment.
•Opioid claimants would also receive warrants for approximately 19.99% of the reorganized Company’s new outstanding shares, after giving effect to the exercise of the warrants, but subject to dilution from equity reserved under the management incentive plan, exercisable at any time on or prior to the seventh anniversary of the Company's emergence, at a strike price reflecting an aggregate equity value for the reorganized Debtors of $1,551.0 million (the "New Opioid Warrants").
•Upon commencing the Chapter 11 filing, the Company will comply with an agreed-upon operating injunction with respect to the operation of its opioid business.
As of December 25, 2020, the Company maintained an accrual for this contingency of $1,600.0 million and the New Opioid Warrants were ascribed no value. Refer to Note 21 for further information regarding the valuation of the New Opioid Warrants. For further information on the terms of this proposed resolution, refer to Note 2.
Other Opioid-Related Matters. In addition to the lawsuits described above, certain entities of the Company have received subpoenas and civil investigative demands ("CID(s)") for information concerning the sale, marketing and/or distribution of prescription opioid medications and the Company's suspicious order monitoring programs, including from the DOJ and the Attorneys General for Missouri, New Hampshire, Kentucky, Washington, Alaska, South Carolina, Puerto Rico, New York, West Virginia, Indiana, the Divisions of Consumer Protection and Occupational and Professional Licensing of the Utah Department of Commerce, and the New York State Department of Financial Services. The Company has been contacted by the coalition of State Attorneys General investigating the role manufacturers and distributors may have had in contributing to the increased use of opioids in the U.S. On January 27, 2018, the Company received a grand jury subpoena from the U.S. Attorneys' Office (“USAO”) for the Southern District of Florida for documents related to the distribution, marketing and sale of generic oxymorphone products. On April 17, 2019, the Company received a grand jury subpoena from the USAO for the Eastern District of New York ("EDNY") for documents related to the sales and marketing of controlled substances, the policies and procedures regarding controlled substances, and other related documents. On June 4, 2019, the Company received a rider from the USAO for EDNY requesting additional documents regarding the Company's anti-diversion program. On December 15, 2020, the Company received a subpoena from the Western District of Virginia for documents related to services provided by an outside consulting firm. The Company is responding or has responded to these subpoenas, CIDs and any informal requests for documents.
In August 2018, the Company received a letter from the leaders of the Energy and Commerce Committee in the U.S. House of Representatives requesting a range of documents relating to its marketing and distribution of opioids. The Company completed its response to this letter in December 2018. The Company received a follow-up letter in January 2020 and provided the committee a response. The Company is cooperating with the investigation.
The Attorneys General for Kentucky, Alaska, New York, New Hampshire, West Virginia and Puerto Rico have subsequently filed lawsuits against the Company. Similar subpoenas and investigations may be brought by others or the foregoing matters may be expanded or result in litigation. The Company intends to vigorously defend itself in these matters. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with these investigations and/or lawsuits.
On April 21, 2020, New York Governor Andrew Cuomo announced that the New York State Department of Financial Services had filed a Statement of Charges against Mallinckrodt, including allegations that it misrepresented the safety and efficacy of its branded and unbranded opioid products and downplayed the risks of negative outcomes to patients, resulting in claims for payment of medically unnecessary opioid prescriptions to commercial insurance companies. The Statement of Charges claims that Mallinckrodt violated Section 403 of the New York Insurance Law, which prohibits fraudulent insurance acts and includes penalties of up to $5,000 plus the amount of the fraudulent claim for each violation. It further alleges that Mallinckrodt violated Section 408 of the Financial Services Law, which prohibits intentional fraud or intentional misrepresentation of a material fact with respect to a financial product or service and includes penalties of up to $5,000 per violation. The Department claims that each fraudulent prescription constitutes a separate violation of these laws. A hearing on the Statement of Charges was scheduled for January 25, 2021, but the Department of Financial Services agreed to a voluntary stay on October 15, 2020. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
On June 1, 2020, a putative class action lawsuit was filed against Mallinckrodt plc, Mallinckrodt Canada ULC, the Canadian Ministry of Health ("Province") and the College of Pharmacists of British Columbia ("College") in the Supreme Court of British Columbia, captioned Laura Shaver v. Mallinckrodt Canada ULC, et al., No. VLC-S-S-205793. The action purports to be brought on behalf of any persons (1) prescribed Methadose for opioid agonist treatment in British Columbia after March 1, 2014, (2) covered by Pharmacare Plan C within British Columbia who were prescribed Methadose for opioid agonist treatment after February 1, 2014, (3) who transitioned from compounded methadone to Methadose for opioid agonist treatment in British Columbia after March 1, 2014, or (4) covered by Pharmacare Plan C within British Columbia who were transitioned from compounded methadone to Methadose for opioid agonist treatment after February 1, 2014. The suit generally alleges that the Province’s decision to grant Methadose coverage under Pharmacare Plan C and remove compounded methadone from coverage under Pharmacare Plan C had adversely affected those being treated for opioid use disorder. The suit asserts that the Province, the College and the Mallinckrodt defendants failed to warn patients about, and made false representations concerning, the efficacy of Methadose and the risks of switching from compounded methadone to Methadose. The suit seeks general, special, aggravated, punitive and exemplary damages in an unspecified amount, costs and interest and injunctive relief against the Province, the College and the Mallinckrodt defendants. Pursuant to two orders granted by the Ontario Superior Court of Justice (Commercial List) on October 15, 2020, the Chapter 11 proceedings commenced by Mallinckrodt plc and Mallinckrodt Canada ULC pursuant to the U.S. Bankruptcy Code were recognized and given effect in Canada. Among other things, the Canadian Court has stayed all proceedings against the Mallinckrodt defendants, including the British Columbia class action proceedings. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
New York State Opioid Stewardship Act. On October 24, 2018, the Company filed suit in the U.S. District Court for the Southern District of New York against the State of New York, asking the court to declare New York State's Opioid Stewardship Act (“OSA”) unconstitutional and to enjoin its enforcement. On December 19, 2018, the court declared the OSA unconstitutional and granted the Company's motion for preliminary injunctive relief. On January 17, 2019, the State of New York appealed the court's decision. On September 14, 2020, a panel of the U.S. Court of Appeals for the Second Circuit reversed in part the lower court’s judgment, finding that the lower court should have dismissed the Company’s (and other parties’) challenges to the OSA for lack of subject matter jurisdiction. Together with the other plaintiffs, we filed a petition for rehearing en banc to challenge the panel's decision, which was denied on December 18, 2020. On February 12, 2021, the Second Circuit granted the parties' request to stay the mandate. The parties plan to file a petition for certiorari with the Supreme Court. In April 2019, the State of New York passed its 2020 budget, which amended the OSA so that if the OSA decision is reversed on appeal, the OSA would apply only to the sale or distribution of certain opioids in New York for 2017 and 2018 and, effective July 1, 2019, imposed an excise tax on certain opioids.
Acthar Gel-Related Matters
SEC Subpoena. In August 2019, the Company received a subpoena from the SEC for documents related to the Company's disclosure of its dispute with the U.S. Department of Health and Human Services ("HHS") and CMS (together with HHS, the "Agency") concerning the base date average manufacturer price ("AMP") for Acthar Gel under the Medicaid Drug Rebate Program for Mallinckrodt's Acthar Gel, which is also the subject of litigation that the Company filed against the Agency (see Medicaid Lawsuit below). The Company is cooperating with the SEC's investigation, which is ongoing.
Medicaid Lawsuit. In May 2019, CMS issued a final decision directing the Company to revert to the original base date AMP used to calculate Medicaid drug rebates for Acthar Gel despite CMS having given the previous owner of the product, Questcor, written authorization in 2012 to reset the base date AMP. Upon receipt of CMS’s final decision, the Company filed suit in the D.C. District Court against the Agency under the Administrative Procedure Act seeking to have the decision declared unlawful and set aside. In March 2020, the Company received an adverse decision from the D.C. District Court. The Company immediately sought reconsideration by the D.C. District Court, which was denied. The Company then appealed the D.C. District Court’s decision to the D.C. Circuit. In June 2020, while its appeal remained pending, the Company was required to revert to the original base date AMP for Acthar in the government’s price reporting system.
As a result of this contingency, the Company incurred a retrospective one-time charge of $641.1 million (the "Acthar Gel Medicaid Retrospective Rebate"), of which $536.0 million and $105.1 million have been reflected as a component of net sales and operating expenses, respectively, in the consolidated statement of operations for fiscal 2020. The $105.1 million reflected as a component of operating expenses represents a pre-acquisition contingency related to the portion of the Acthar Gel Medicaid Retrospective Rebate that arose from sales of Acthar Gel prior to the Company’s acquisition of Questcor in August 2014. As of December 25, 2020, $638.9 million related to the Medicaid lawsuit was recorded within LSTC.
The D.C. Circuit heard argument on the merits of the Company's appeal in September 2020, prior to the Company's filing of the Chapter 11 Cases on October 12, 2020. At the joint request of the parties, the D.C. Circuit has agreed to hold the case in abeyance pending completion of the Proposed Acthar Gel-Related Settlement, which was conditioned upon the Company entering the Chapter 11 restructuring process. Pursuant to the Proposed Acthar Gel-Related Settlement, the Company has agreed to pay $260.0 million over seven years and to reset Acthar Gel’s Medicaid rebate calculation as of July 1, 2020, such that state Medicaid programs will receive 100% rebates on Acthar Gel Medicaid sales, based on current Acthar Gel pricing. Additionally, upon execution of the Proposed Acthar Gel-Related Settlement, the Company will dismiss its D.C. Circuit appeal. The Company expects that the Proposed Acthar Gel-Related Settlement will be completed over the next several months, subject to Bankruptcy Court approval.
Florida Civil Investigative Demand. In February 2019, the Company received a CID from the USAO for the Middle District of Florida for documents related to alleged payments to healthcare providers in Florida and whether those payments violated the Anti-Kickback Statute. The Company has cooperated with the investigation.
U.S. House Committee Investigation. In January 2019, the Company along with 11 other pharmaceutical companies, received a letter from the U.S. House Committee on Oversight and Reform requesting information relating to the Company's pricing strategy for Acthar Gel and related matters. The Company cooperated with the Committee's investigation. The Company's President and CEO Mark C. Trudeau accepted an invitation from the Committee to discuss the Company's pricing policies and modernization strategy for Acthar Gel at a hearing before the Committee, which took place on October 1, 2020.
Boston Civil Investigative Demand. In January 2019, the Company received a CID from the USAO for the District of Massachusetts for documents related to the Company's participation in the Medicaid Drug Rebate Program. The Company responded to the government's requests and cooperated with the investigation.
In March 2020, the U.S. District Court for the District of Massachusetts unsealed a qui tam complaint under the federal FCA ("Boston FCA") against the Company in which the DOJ and 32 states and territories have intervened alleging that the Company had failed to pay the correct amount of rebates for Acthar Gel. Other related legal proceedings involving the Company, including the litigation described as the Medicaid Lawsuit, are discussed above. The Company disagrees with the government's characterization of
the facts and applicable law. The Company moved to dismiss the DOJ's Complaint in Intervention in July 2020 and moved to dismiss the complaint of the intervening states in September 2020. As previously disclosed, in the event that the Company does not prevail in its Medicaid lawsuit the potential for damages in this matter could be up to approximately $1,280.0 million, after subtracting out potential restitution, related to the Acthar Gel Medicaid Retrospective Rebate. The Company has not recognized an accrual for this contingency in its financial results for fiscal 2020.
As discussed above, on October 12, 2020, the Company announced the Proposed Acthar Gel-Related Settlement to resolve various Acthar Gel-related matters, which includes this associated Boston FCA lawsuit. The court administratively closed the case on November 4, 2020, upon the parties' joint request for a stay of the litigation due to the Proposed Acthar Gel-Related Settlement and Chapter 11 Cases.
Boston Subpoena. In December 2016, the Company received a subpoena from the USAO for the District of Massachusetts for documents related to the Company's payments to charitable foundations, the provision of financial and other support by charitable foundations to patients receiving Acthar Gel, and related matters. The Company has responded to these requests and cooperated in the investigation.
Questcor EDPA Qui Tam Litigation. In September 2012, Questcor received a subpoena from the USAO for the EDPA for information relating to its promotional practices related to Acthar Gel. The investigation eventually expanded to include Questcor's provision of financial and other support to patients, including through charitable foundations and related matters. The Company cooperated with the investigation. In March 2019, the U.S. District Court for the EDPA unsealed two qui tam actions involving the allegations under investigation by the USAO for the EDPA. The DOJ intervened in both actions, which were later consolidated. In September 2019, the Company executed a settlement agreement with the DOJ for $15.4 million and finalized settlements with the three qui tam plaintiffs. These settlements were paid during the three months ended September 27, 2019 and resolve the portion of the investigation and litigation involving Questcor's promotional practices related to Acthar Gel.
In June 2019, the DOJ filed its Complaint in Intervention in the litigation, alleging claims under the FCA based on Questcor's relationship with and donations to an independent charitable patient co-pay foundation. The Company disagrees with the DOJ's characterization of the facts and applicable law. In January 2020, the court denied the Company's motion to dismiss the Complaint in Intervention.
As discussed above, on October 12, 2020, the Company announced the Proposed Acthar Gel-Related Settlement to resolve various Acthar Gel-related matters, which includes this Questcor EDPA Qui Tam Litigation. On October 15, 2020, the court agreed to stay the proceedings, at the request of the parties, as they work towards completion of the Proposed Acthar Gel-Related Settlement.
Other Related Matters
Generic Pricing Subpoena. In March 2018, the Company received a grand jury subpoena issued by the U.S. District Court for the EDPA pursuant to which the Antitrust Division of the DOJ is seeking documents regarding generic products and pricing, communications with generic competitors and other related matters. The Company is in the process of responding to this subpoena and intends to cooperate in the investigation.
MNK 2011 Inc. (formerly known as Mallinckrodt Inc.) v. U.S. Food and Drug Administration and United States of America. In November 2014, the FDA reclassified the Company's Methylphenidate ER in the Orange Book: Approved Drug Products with Therapeutic Equivalence ("the Orange Book"). In November 2014, the Company filed a Complaint in the U.S. District Court for the District of Maryland Greenbelt Division against the FDA and the U.S. (the "MD Complaint") for judicial review of the FDA's reclassification. In July 2015, the court granted the FDA's motion to dismiss with respect to three of the five counts in the MD Complaint and granted summary judgment in favor of the FDA with respect to the two remaining counts (the “MD Order”). On October 18, 2016, the FDA initiated proceedings, proposing to withdraw approval of the Company's Abbreviated New Drug Application ("ANDA") for Methylphenidate ER. On October 21, 2016, the U.S. Court of Appeals for the Fourth Circuit issued an order placing the Company's appeal of the MD Order in abeyance pending the outcome of the withdrawal proceedings. The parties exchanged documents and in April 2018, the Company filed its submission in support of its position in the withdrawal proceedings. A potential outcome of the withdrawal proceedings is that the Company's Methylphenidate ER products may lose their FDA approval and have to be withdrawn from the market.
Therakos® Subpoena. In March 2014, the USAO for the EDPA requested the production of documents related to an investigation of the U.S. promotion of Therakos® photopheresis ("Therakos") drug/device system UVADEX/UVAR XTS and UVADEX/CELLEX (collectively, the "Therakos System"), for indications not approved by the FDA, including treatment of patients with graft versus host disease ("GvHD") and solid organ transplant patients, including pediatric patients. The investigation also includes Therakos' efforts to secure FDA approval for additional uses of, and alleged quality issues relating to, UVADEX/UVAR. In August 2015, the USAO for the EDPA sent Therakos a subsequent request for documents related to the investigation and has since made certain related requests. The Company responded to these requests.
Patent Litigation
Branded Products: The Company will continue to vigorously enforce its intellectual property rights relating to its Branded products to prevent the marketing of infringing generic or competing products prior to the expiration of patents covering those products, which, if unsuccessful, could adversely affect the Company's ability to successfully maximize the value of individual Branded products and have an adverse effect on its financial condition, results of operations and cash flows. In the case of litigation filed against potential generic or competing products to Company’s Branded products, those litigation matters can either be settled or the litigation pursued through a trial and any potential appeals of the lower court decision.
Amitiza Patent Litigation: The Company and Takeda Pharmaceutical Company Limited, Takeda Pharmaceuticals USA, Inc., and Takeda Pharmaceuticals America, Inc. (collectively "Takeda," the exclusive licensee under the patents in litigation) initiated litigation against six parties that submitted ANDAs with Paragraph IV certifications seeking to launch a generic version of Company’s Amitiza product. Each of those litigation matters were subsequently settled by entering into non-exclusive license agreements that granted the right to market a competing generic version of Amitiza in the U.S. on or after a specified entry date, or earlier under certain circumstances. One party (Par Pharmaceutical) entered into a settlement agreement that granted an entry date on or after January 1, 2021, or earlier under certain circumstances. Par has announced the launch of an authorized generic version of Company’s Amitiza product. The other five parties (Dr. Reddy's Laboratories, Amneal Pharmaceuticals, Teva Pharmaceuticals, Sun Pharmaceutical and Zydus Pharmaceuticals) entered into settlement agreements that granted each party an entry date on or after January 1, 2023, or earlier under certain circumstances. The Company intends to vigorously enforce its intellectual property rights relating to Amitiza against any additional parties that may seek to market a generic version of Company’s Amitiza product.
Ofirmev Patent Litigation: The Company initiated litigation against eleven parties that submitted ANDA or 505(b)(2) NDA applications with Paragraph IV certifications seeking to launch a generic or competing version of Company’s Ofirmev product. One party (Exela) was prohibited from launching a generic of Ofirmev as the Company obtained a decision from the District Court that Exela infringed certain patents covering Ofirmev. That decision was affirmed on appeal to the Federal Circuit Court of Appeals (“Federal Circuit”). If Exela were to pursue their ANDA after expiration of the infringed patent expiring December 6, 2021 (including PED exclusivity) they would still be subject to potential litigation regarding the other Ofirmev patents listed in the Orange Book. Each of the other ten litigation matters were settled by entering into non-exclusive license agreements that granted each party the right to market a competing version of Ofirmev in the U.S. on or after December 6, 2020, or earlier under certain circumstances. The parties that entered settlement agreements are Paddock Laboratories (now Custopharm), Sandoz, Wockhardt, Fresenius Kabi, Mylan, InnoPharma/West-Ward Pharmaceuticals, Aurobindo, B. Braun Medical, Altan Pharma and Baxter Healthcare. Paddock, Sandoz, Fresenius Kabi, Mylan, Aurobindo and B. Braun Medical have obtained FDA approval and Custopharm, Sandoz, Fresenius Kabi, Mylan, Aurobindo and B. Braun Medical have publicly announced that they have launched (or have plans to launch) their competing products.
INOmax Patent Litigation: The Company initiated litigation against Praxair Distribution, Inc. and Praxair, Inc. (collectively “Praxair”) following receipt of a notice from Praxair concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a nitric oxide drug product. Praxair also made a 510(k) regulatory submission for a nitric oxide delivery system. The District Court issued a decision ruling that five of the Company’s patents were invalid and six were not infringed by Praxair. The Company appealed that decision to the Federal Circuit but the District Court decision was substantively affirmed with respect to invalidity and non-infringement. The Company’s pursuit of en banc review at the Federal Circuit and review by the U.S. Supreme Court were unsuccessful. Praxair received FDA approval of their ANDA for their Noxivent nitric oxide and clearance of their 510(k) for their NOxBOXi device on October 2, 2018. The adverse final outcome in the appeal of the Praxair litigation resulted in Praxair’s launch of a competitive nitric oxide product before the expiration of the last of the listed patents on May 3, 2036 (November 3, 2036 including pediatric exclusivity), which could adversely affect the Company's ability to successfully maximize the value of INOmax and have an adverse effect on its financial condition, results of operations and cash flows. The Company continues to develop and pursue patent protection of next generation nitric oxide delivery systems and additional uses of nitric oxide. The Company further intends to vigorously enforce its intellectual property rights relating to its nitric oxide products against any additional parties that may seek to market a generic version of Company’s INOmax product and/or next generation delivery systems.
Generic Products: The Company continues to pursue development of a portfolio of generic products, some of which require submission of a Paragraph IV certification against patents listed in the FDA Orange Book for the Branded product asserting that the Company’s proposed generic product does not infringe and/or the Orange Book patent(s) are invalid and/or unenforceable. In the case of litigation filed against Company for such potential generic products, those litigation matters can either be settled or the litigation pursued through a trial and any potential appeals of the lower court decision in order to successfully launch those generic products in the future.
Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica NV v. Pharmascience Inc. and SpecGx LLC. In December 2019, Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica NV (collectively “Janssen”) initiated litigation against the Company and Pharmascience Inc. (“Pharmascience”) relating to the collaboration between Company and Pharmascience that resulted in Pharmascience's ANDA submission, containing a Paragraph IV patent certification, with the FDA for a competing version of Invega
Sustenna. Janssen alleges that the Company and Pharmascience infringe U.S. Patent No. 9,439,906. The litigation is currently stayed with respect to the Company as a result of the Company's Chapter 11 filing. If the stay is lifted, the Company intends to vigorously defend its position.
Shire Development LLC, Shire LLC and Shire US, Inc. v. SpecGx LLC. In May 2018, Shire Development LLC, Shire LLC and Shire US, Inc. (collectively “Shire”) initiated litigation against the Company alleging that the Company infringed U.S. Patent Nos. 6,913,768, 8,846,100, and 9,173,857 following receipt of an April 2018 notice from the Company concerning its submission of an ANDA, containing a Paragraph IV patent certification with the FDA for a competing version of Mydayis. On January 28, 2019, the parties entered into a settlement agreement under which the Company was granted the non-exclusive right to market a competing generic version of Mydayis in the U.S. under its ANDA on or after May 10, 2023 (or November 10, 2023 if any pediatric exclusivity is granted by the FDA with respect to the Mydayis product), or earlier under certain circumstances.
Jazz Pharmaceuticals, Inc. and Jazz Pharmaceuticals Ireland v. Mallinckrodt PLC, Mallinckrodt Inc. and Mallinckrodt LLC. In January 2018, Jazz Pharmaceuticals, Inc. and Jazz Pharmaceuticals Ireland (collectively, "Jazz") initiated litigation against the Company alleging that the Company infringed U.S. Patent Nos. 7,668,730, 7,765,106, 7,765,107, 7,895,059, 8,457,988, 8,589,182, 8,731,963, 8,772,306, 9,050,302, and 9,486,426 following receipt of a November 2017 notice from the Company concerning its submission of an ANDA, containing a Paragraph IV patent certification with the FDA for a competing version of Xyrem. On June 4, 2018, the parties entered into a settlement agreement under which Company was granted the non-exclusive right to market a competing sodium oxybate product in the U.S. under its ANDA on or after December 31, 2025, or earlier under certain circumstances.
Commercial and Securities Litigation
Shareholder Litigation (HealthCor). In October 2020, four purported shareholders of the Company’s stock filed a complaint in the D.C. District Court against the Company, its CEO Mark C. Trudeau and its former Chief Financial Officer ("CFO") Matthew K. Harbaugh. The lawsuit, captioned HealthCor Offshore Master Fund, L.P., et al. v. Mallinckrodt plc, et al., asserts claims for false and misleading statements in violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, common law fraud, and negligent misrepresentation arising from substantially similar allegations as those contained in the Shenk class action lawsuit. The complaint seeks damages in an unspecified amount. The defendants intend to vigorously defend themselves in this matter. As this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. As to the Company, this litigation is subject to the automatic stay under §362 of the Bankruptcy Code and the Company has requested an order from the Bankruptcy Court enjoining proceedings against the individual named defendants.
Health Care Service Corporation Litigation. In February 2020, Health Care Service Corp. ("HCSC") filed a non-class complaint against the Company in California state court alleging improper pricing, marketing and distribution of Acthar Gel, and challenging the acquisition of rights to Synacthen® Depot ("Synacthen") by the Company's predecessor-in-interest. The complaint included claims for violation of the New Jersey RICO statute and various states’ antitrust laws. It also included claims for conspiracy to violate the New Jersey RICO statute, fraud, unlawful restraint of trade, unfair and deceptive trade practices, insurance fraud, tortious interference with contract and unjust enrichment. The case, which is proceeding as Health Care Service Corp. v. Mallinckrodt ARD LLC, et al., alleges similar facts as those alleged in the Humana matter below. The Company intends to vigorously defend itself in this matter and the Company moved to dismiss the complaint in June 2020. In August 2020, the court dismissed the antitrust and tortious interference claims without prejudice, but held that HCSC could proceed to discovery on its remaining counts. The Company disagrees with the court's decision and contests liability. The Company was preparing to move to dismiss an amended complaint when the Company filed the Chapter 11 Cases. In January 2021, the Company removed this case to federal court and moved for transfer to the District of Delaware where the Company's Chapter 11 Cases are pending. HCSC has moved to remand the case back to state court. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
City of Marietta Litigation. In February 2020, the City of Marietta, Georgia filed a putative civil class action complaint against the Company in the U.S. District Court for the Northern District of Georgia relating to the price of Acthar Gel. The complaint, which pleads one claim for unjust enrichment, purports to be brought on behalf of third-party payers and their beneficiaries as well as people without insurance in the U.S. and its Territories who paid for Acthar Gel from four years prior to the filing of the Complaint until the date of trial. The case is proceeding as City of Marietta v. Mallinckrodt ARD LLC. Marietta alleges that it has paid $2.0 million to cover the cost of an Acthar Gel prescription of an employee and that the Company has been unjustly enriched as a result. The Company intends to vigorously defend itself in this matter, and has moved to dismiss the complaint. The Company's motion to dismiss was pending when the Company filed the Chapter 11 Cases. On October 16, 2020, the court ordered the case administratively closed in light of the Chapter 11 Cases.
Local 322. In November 2019, the United Association of Plumbers & Pipefitters Local 322 of Southern New Jersey ("Local 322") filed a putative class action complaint against the Company and other defendants in New Jersey state court on behalf of New Jersey and third party payers for alleged deceptive marketing and anti-competitive conduct related to the sale and distribution of Acthar Gel. The complaint asserts claims under the New Jersey Consumer Fraud Act, the New Jersey Antitrust Act, the New Jersey RICO statute, negligent misrepresentation, conspiracy/aiding and abetting and unjust enrichment. The proposed class is defined as "All third-party payers and their beneficiaries (1) who are current citizens and residents of the State of New Jersey, and (2) who, for purposes other
than resale, purchased or paid for Acthar Gel from August 27, 2007 through the present." In January 2020, after removing the complaint to federal court in New Jersey, the Company moved to dismiss or stay the case. On August 18, 2020 the court dismissed all claims against the Company other than Local 322's antitrust claim relating to the Company's predecessor-in-interest's acquisition of Synacthen. The Company disagrees with the court's decision and contests liability. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. In October 2020, the court ordered the case administratively closed in light of the Company's Chapter 11 Cases. In January 2021, the Company moved to transfer this case to the District of Delaware where the Company's Chapter 11 Cases are pending.
Shareholder Derivative Litigation (Brandhorst). In September 2019, a purported shareholder of the Company's stock filed a shareholder derivative complaint in the D.C. District Court against the Company, as nominal defendant, as well as its CEO, its former CFO, its Executive Vice President Hugh O'Neill, and the following members of the Board of Directors: Angus Russell, David Carlucci, J. Martin Carroll, David Norton, JoAnn Reed and Kneeland Youngblood (collectively with Trudeau, Harbaugh and O'Neill, the “Brandhorst Defendants”). The lawsuit is captioned Lynn Brandhorst, derivatively on behalf of nominal defendant Mallinckrodt PLC v. Mark Trudeau et al. and relies on the allegations from the putative class action securities litigation that was filed against the Company and certain of its officers in January 2017, captioned Patricia A. Shenk v. Mallinckrodt plc, et al. described further below. The complaint asserts claims for contribution, breaches of fiduciary duty, unjust enrichment, abuse of control, and gross mismanagement, and is premised on allegations that the Brandhorst Defendants caused the Company to make the allegedly false or misleading statements at issue in the Shenk class action lawsuit. The complaint seeks damages in an unspecified amount and corporate governance reforms. On November 20, 2019, this matter was stayed by agreement of the parties pending resolution of the Shenk lawsuit below. The Brandhorst Defendants intend to vigorously defend themselves in this matter. As to the Company, this litigation is subject to the automatic stay under §362 of the Bankruptcy Code, and on December 4, 2020, the Bankruptcy Court also enjoined the proceedings against the Brandhorst Defendants.
Humana Litigation. In August 2019, Humana Inc. filed a lawsuit against the Company in the U.S. District Court for the Central District of California alleging violations of federal and state antitrust laws; RICO violations under 18 U.S.C. § 1962(c); conspiracy to violate RICO under 18 U.S.C. § 1962(d); violations of state unfair competition, consumer fraud and deceptive trade practice laws; state insurance fraud; tortious interference with contract; and unjust enrichment related to the pricing and marketing of Acthar Gel and the acquisition of Synacthen by the Company's predecessor-in-interest. Humana alleges that it paid more than $700.0 million for Acthar Gel and seeks undisclosed damages from 2011 through present. The case alleges similar facts as those alleged in the MSP and Rockford matters below, and includes references to allegations at issue in a pending qui tam action against the Company in the U.S. District Court for the EDPA (see Questcor EDPA Qui Tam Litigation above). The case is proceeding as Humana Inc. v. Mallinckrodt ARD LLC. In March 2020, the court granted-in-part and denied-in-part the Company's motion to dismiss Humana's claims. The court dismissed Humana's antitrust and tortious interference claims with leave to amend. The court denied the Company's motion to dismiss Humana's RICO and other fraud-based claims. Humana filed an amended complaint in May 2020, which the Company moved to dismiss. In August 2020, the court granted-in-part and denied-in-part the Company's motion to dismiss the amended complaint. The court dismissed with prejudice Humana's claims under most state antitrust laws to the extent predicated on conduct before 2014 and Humana's tortious interference claims. The court ruled that Humana's federal antitrust, federal RICO, state insurance fraud and unjust enrichment claims may proceed. The Company disagrees with the court's decision and contest liability. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. In September 2020, the Company answered the remaining allegations and claims of the operative complaint. In October 2020, the court entered an order acknowledging the automatic stay of this litigation pursuant to §362 of the Bankruptcy Code. In January 2021, the Company moved to transfer this case to the District of Delaware where the Company's Chapter 11 Cases are pending. Humana opposes transfer.
Putative Class Action Litigation - Steamfitters Local Union No. 420. In July 2019, Steamfitters Local Union No. 420 filed a putative class action lawsuit against the Company and United BioSource Corporation in the U.S. District Court for the EDPA, proceeding as Steamfitters Local Union No. 420 v. Mallinckrodt ARD, LLC, et al. The complaint makes similar allegations as those alleged in related state and federal actions that were filed by the same plaintiff's law firm in New Jersey, Illinois, Pennsylvania, Tennessee and Maryland (now dismissed; see WCBE below), and includes references to allegations at issue in a qui tam action that was filed against the Company in the U.S. District Court for the EDPA (see Questcor EDPA Quit Tam Litigation above). The complaint alleges RICO violations under 18 U.S.C. § 1962(c); conspiracy to violate RICO under 18 U.S.C. § 1962(c); violations of the Pennsylvania (and other states) Unfair Trade Practices and Consumer Protection laws; negligent misrepresentation; aiding and abetting/conspiracy; and unjust enrichment. The complaint also seeks declaratory and injunctive relief. In December 2019, the court denied the Company's motion to dismiss the complaint. The Company disagrees with the court's decision and contests liability. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. In January 2021, the Company moved to transfer this case to the District of Delaware where the Company's Chapter 11 Cases are pending. Steamfitters Local Union No. 420 opposes transfer.
Putative Class Action Securities Litigation (Strougo). In July 2019, a putative class action lawsuit was filed against the Company, its CEO Mark C. Trudeau, its CFO Bryan M. Reasons, its former Interim CFO George A. Kegler and its former CFO Matthew K. Harbaugh, in the U.S. District Court for the Southern District of New York, captioned Barbara Strougo v. Mallinckrodt plc, et al. The
complaint purports to be brought on behalf of all persons who purchased or otherwise acquired Mallinckrodt's securities between February 28, 2018 and July 16, 2019. The lawsuit generally alleges that the defendants made false and misleading statements in violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder related to the Company's clinical study designed to assess the efficacy and safety of its Acthar Gel in patients with amyotrophic lateral sclerosis. The lawsuit seeks monetary damages in an unspecified amount. A lead plaintiff was designated by the court on June 25, 2020, and on July 30, 2020, the court approved the transfer of the case to the U.S. District Court for the District of New Jersey. On August 10, 2020, an amended complaint was filed by the lead plaintiff alleging an expended putative class period of May 3, 2016 through March 18, 2020 against the Company and Mark C. Trudeau, Bryan M. Reasons, George A. Kegler and Matthew K. Harbaugh, as well as newly named defendants Kathleen A. Schaefer, Angus C. Russell, Melvin D. Booth, JoAnn A. Reed, Paul R. Carter, and Mark J. Casey (collectively with Trudeau, Reasons, Kegler and Harbaugh, the "Strougo Defendants"). The amended complaint claims that the defendants made false and/or misleading statements and/or failed disclose that: (i) the CMS had informed the Company that it was using the wrong base date AMP for calculating the Medicaid rebate the Company owed CMS for Acthar Gel each quarter since 2014; (ii) the Company’s reported net income was improperly inflated in violation of GAAP; (iii) the Company’s contingent liabilities associated with the rebates owed to CMS for Acthar Gel were misrepresented; (iv) the Company’s fiscal year 2019 guidance for Acthar Gel net sales was false; (v) the Company failed to disclose material information regarding the cases captioned Landolt v. Mallinckrodt ARD LLC, No. 1:18-cv-11931-PBS (D. Mass.) (Landolt) and U.S. ex rel. Strunck v. Mallinckrodt ARD LLC, No. 2:12-cv-0175-BMS (E.D. Pa.) (Strunck), or the related investigation by the DOJ and (vi) the Company failed to disclose that the clinical trials for Acthar Gel were purportedly initiated in order to make it appear that alternative revenue opportunities for Acthar Gel existed and thus offset the expected 10% decline in net sales as a result of the rebates the Company now had to pay. On October 1, 2020, the defendants filed a motion to dismiss the amended complaint. The defendants intend to vigorously defend themselves in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. As to the Company, this litigation is subject to the automatic stay under §362 of the Bankruptcy Code, and on December 4, 2020, the Bankruptcy Court also enjoined proceedings against the Strougo Defendants. The plaintiffs subsequently appealed the Bankruptcy Court action to the U.S. District Court in Delaware through a motion for leave to appeal. The Company filed its opposition to this motion on December 28, 2020.
Acument Global. In May 2019, Acument Global Technologies, Inc. ("Acument"), filed a non-class complaint against the Company and other defendants in Tennessee state court alleging violations of Tennessee Consumer Protection Laws, unjust enrichment, fraud and conspiracy to defraud. The case alleges similar facts as those alleged in the MSP and Rockford matters discussed below, and is captioned Acument Global Technologies, Inc., v. Mallinckrodt ARD Inc., et al. In February 2020, the court granted-in-part and denied-in-part the Company’s motion to dismiss. While the court dismissed Acument’s fraud-based claims and its claim under the Tennessee Consumer Protection Act, the court ruled that the antitrust and unjust enrichment claims may proceed. The Company disagrees with the court's decision and contests liability. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. In January 2021, the Company removed this case to federal court and moved for transfer to the District of Delaware where the Company’s Chapter 11 Cases are pending. Acument has moved to remand the case back to state court.
Washington County Board of Education ("WCBE"). In May 2019, WCBE filed a non-class complaint against the Company and other defendants in Maryland state court alleging violations of Maryland Consumer Protection Act, negligent misrepresentation, fraud, unjust enrichment and conspiracy to defraud. The case, which was removed to the U.S. District Court for the District of Maryland in June 2019, alleges similar facts as those alleged in the MSP and Rockford matters discussed below, and was captioned Washington County Board of Education v. Mallinckrodt ARD Inc., et al. On January 4, 2020, the District Court of Maryland dismissed the complaint. Thereafter, the plaintiff filed a notice of voluntary dismissal in the District Court of Maryland, which the Company moved to strike. The District Court of Maryland granted the Company's motion to strike, and the plaintiff appealed that order to the U.S. Court of Appeals for the Fourth Circuit in June 2020. The Fourth Circuit dismissed plaintiff's appeal in September 2020.
Local 542. In May 2018, the International Union of Operating Engineers Local 542 filed a non-class complaint against the Company and other defendants in Pennsylvania state court alleging improper pricing and distribution of Acthar Gel, in violation of Pennsylvania's Unfair Trade Practices and Consumer Protection Law, aiding and abetting, unjust enrichment and negligent misrepresentation. The case alleges similar facts as the MSP and Rockford matters discussed below, and is captioned Int'l Union of Operating Engineers Local 542 v. Mallinckrodt ARD Inc., et al. Plaintiff filed an amended complaint in August 2018, the Company's objections to which were denied by the court. The Company disagrees with the court's decision and contest liability. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. In January 2021, the Company removed this case to federal court and moved for transfer to the District of Delaware where the Company’s Chapter 11 Cases are pending. Local 542 has moved to remand the case back to the state court. On March 10, 2021, the federal court in Pennsylvania granted the Company's motion to transfer the case to the District of Delaware and denied without prejudice Local 542's motion to remand the case to state court.
Putative Class Action Litigation (MSP). In October 2017, a putative class action lawsuit was filed against the Company and United BioSource Corporation in the U.S. District Court for the Central District of California. Pursuant to a motion filed by the defendants, the case was transferred to the U.S. District Court for the Northern District of Illinois in January 2018, and is currently proceeding as MSP Recovery Claims, Series II, LLC, et al. v. Mallinckrodt ARD, Inc., et al. The Company filed a motion to dismiss in
February 2018, which was granted in January 2019 with leave to amend. MSP filed the operative First Amended Class Action Complaint on April 10, 2019, in which it asserts claims under federal and state antitrust laws and state consumer protection laws and names additional defendants. The complaint alleged that the Company unlawfully maintained a monopoly in a purported ACTH product market by its predecessor in interest's acquisition of the U.S. rights to Synacthen and reaching anti-competitive agreements with the other defendants by selling Acthar Gel through an exclusive distribution network. The complaint purported to be brought on behalf of all third-party payers, or their assignees, in the U.S. and its territories, who have, as indirect purchasers, in whole or in part, paid for, provided reimbursement for, and/or possess the recovery rights to reimbursement for the indirect purchase of Acthar Gel from August 1, 2007 to present. In March 2020, the court granted the Company’s motion to dismiss the complaint with leave to amend. MSP filed an amended complaint on July 3, 2020. The Company intends to vigorously defend itself in this matter and moved to dismiss the second amended complaint in August 2020. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. On October 13, 2020, the court entered an order acknowledging the automatic stay of this litigation as to the Company pursuant to §362 of the Bankruptcy Code. In January 2021, the Company moved for transfer to the District of Delaware where the Company’s Chapter 11 Cases are pending. MSP opposes transfer.
Employee Stock Purchase Plan (ESPP) Securities Litigation. In July 2017, a purported purchaser of Mallinckrodt stock through Mallinckrodt's ESPPs filed a derivative and class action lawsuit in the Federal District Court in the Eastern District of Missouri, captioned Solomon v. Mallinckrodt plc, et al., against the Company, its CEO, its former CFO, its Controller Kathleen A. Schaefer, and current and former directors of the Company (collectively, the "Solomon Defendants"). On September 6, 2017, plaintiff voluntarily dismissed its complaint in the Federal District Court for the Eastern District of Missouri and refiled virtually the same complaint in the D.C. District Court. The complaint purports to be brought on behalf of all persons who purchased or otherwise acquired Mallinckrodt stock between November 25, 2014, and January 18, 2017, through the ESPPs. In the alternative, the plaintiff alleges a class action for those same purchasers/acquirers of stock in the ESPPs during the same period. The complaint asserts claims under Section 11 of the Securities Act and for breach of fiduciary duty, misrepresentation, non-disclosure, mismanagement of the ESPPs' assets and breach of contract arising from substantially similar allegations as those contained in the Shenk class action lawsuit. Stipulated co-lead plaintiffs were approved by the court on March 1, 2018. Co-lead Plaintiffs filed an amended complaint on June 4, 2018 having a class period of July 14, 2014 to November 6, 2017. The complaint seeks damages in an unspecified amount. On July 6, 2018, this matter was stayed by agreement of the parties pending resolution of the Shenk class action lawsuit. The defendants intends to vigorously defend themselves in this matter. On October 13, 2020, the trial court entered an order acknowledging the automatic stay of this litigation as to the Company pursuant to §362 of the Bankruptcy Code, and the Company has requested an order from the Bankruptcy Court enjoining proceedings against the individual named defendants.
Putative Class Action Litigation (Rockford). In April 2017, a putative class action lawsuit was filed against the Company and United BioSource Corporation in the U.S. District Court for the Northern District of Illinois. The case is captioned City of Rockford v. Mallinckrodt ARD, Inc., et al. The complaint was subsequently amended to, among other things, include an additional named plaintiff and additional defendants. As amended, the complaint purports to be brought on behalf of all self-funded entities in the U.S. and its Territories, excluding any Medicare Advantage Organizations, related entities and certain others, that paid for Acthar Gel from August 2007 to the present. Plaintiff alleges violations of federal antitrust and RICO laws, as well as various state law claims in connection with the distribution and sale of Acthar Gel. In January 2018, the Company filed a motion to dismiss the Second Amended Complaint, which was granted in part in January 2019. The court dismissed one of two named plaintiffs and all claims with the exception of Plaintiff's federal and state antitrust claims. The remaining allegation in the case is that the Company engaged in anti-competitive acts to artificially raise and maintain the price of Acthar Gel. To this end, Plaintiff alleges that the Company unlawfully maintained a monopoly in a purported ACTH product market by its predecessor-in-interest's acquisition of the U.S. rights to Synacthen and conspired with the other named defendants by selling Acthar Gel through an exclusive distributor. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. On October 13, 2020, the court entered an order acknowledging the automatic stay of this litigation as to the Company pursuant to §362 of the Bankruptcy Code. In January 2021, the Company moved for transfer to the District of Delaware where the Company’s Chapter 11 Cases are pending. Rockford opposes transfer.
Putative Class Action Securities Litigation (Shenk). In January 2017, a putative class action lawsuit was filed against the Company and its CEO in the D.C. District Court, captioned Patricia A. Shenk v. Mallinckrodt plc, et al. The complaint purports to be brought on behalf of all persons who purchased Mallinckrodt's publicly traded securities on a domestic exchange between November 25, 2014 and January 18, 2017. The lawsuit generally alleges that the Company made false or misleading statements related to Acthar Gel and Synacthen to artificially inflate the price of the Company's stock. In particular, the complaint alleges a failure by the Company to provide accurate disclosures concerning the long-term sustainability of Acthar Gel revenues and the exposure of Acthar Gel to Medicare and Medicaid reimbursement rates. On January 26, 2017, a second putative class action lawsuit, captioned Jyotindra Patel v. Mallinckrodt plc, et al. was filed against the same defendants named in the Shenk lawsuit in the D.C. District Court. The Patel complaint purports to be brought on behalf of shareholders during the same period of time as that set forth in the Shenk lawsuit and asserts claims similar to those set forth in the Shenk lawsuit. On March 13, 2017, a third putative class action lawsuit, captioned Amy T. Schwartz, et al., v. Mallinckrodt plc, et al., was filed against the same defendants named in the Shenk lawsuit in the D.C. District Court. The Schwartz complaint purports to be brought on behalf of shareholders who purchased shares of the Company between July 14, 2014 and January 18, 2017 and asserts claims similar to those set forth in the Shenk lawsuit. On March 23, 2017, a fourth putative
class action lawsuit, captioned Fulton County Employees' Retirement System v. Mallinckrodt plc, et al., was filed against the Company, its CEO and its former CFO in the D.C. District Court. The Fulton County complaint purports to be brought on behalf of shareholders during the same period of time as that set forth in the Schwartz lawsuit and asserts claims similar to those set forth in the Shenk lawsuit. On March 27, 2017, four separate plaintiff groups moved to consolidate the pending cases and to be appointed as lead plaintiffs in the consolidated case. Lead plaintiff was designated by the court on March 9, 2018. Lead plaintiff filed a consolidated complaint on May 18, 2018, alleging a class period from July 14, 2014 to November 6, 2017, against the Company, its CEO, its former CFO, and Executive Vice President, Hugh O'Neill, as defendants (collectively, the "Shenk Defendants"), and containing similar claims, but further alleging misstatements regarding payer reimbursement restrictions for Acthar Gel. The consolidated complaint seeks damages in an unspecified amount. On August 30, 2018, the lead plaintiff voluntarily dismissed the claims against Mr. O'Neill without prejudice. The Company filed a motion to dismiss the complaint which was granted in part, and denied in part by the court on July 30, 2019. On September 1, 2020, the case deadlines were suspended to allow the parties to pursue mediation. On October 13, 2020, the trial court entered an order acknowledging the automatic stay of this litigation as to the Company pursuant to §362 of the Bankruptcy Code, and on December 4, 2020, the Bankruptcy Court also enjoined the proceedings against the individual named defendants. On December 4, 2020, the Bankruptcy Court granted the Company's motion pursuant to 11 U.S.C. §105 seeking to enjoin lawsuits or administrative proceedings brought by various parties, with an exception for the Shenk lawsuit solely to the extent necessary to allow the previously scheduled mediation to proceed to its conclusion and to potentially settle the Shenk lawsuit, subject to Bankruptcy Court approval. On December 7, 2020 and January 12, 2021, the parties participated in mediation sessions, which resulted in an agreement in principle to settle the Shenk lawsuit. The settlement will be funded solely from the proceeds of the remaining Shenk Defendant's applicable directors and officers liability insurance policies and is subject to approval of the D.C. District Court and the Bankruptcy Court, among other terms and conditions.
Generic Price Fixing Litigation
Generic Pharmaceutical Antitrust MDL. In August 2016, a multidistrict litigation was established in the EDPA relating to allegations of antitrust violations with respect to generic pharmaceutical pricing (the "Generic Pricing MDL"). Plaintiffs in the Generic Pricing MDL, captioned In re: Generic Pharmaceuticals Pricing Antitrust Litigation, allege a conspiracy of price-fixing and customer allocation among generic drug manufacturers beginning in or around July 2009. Since its establishment, the Generic Pricing MDL has expanded to encompass dozens of pharmaceutical companies and more than 100 generic pharmaceutical drugs. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
1199SEIU National Benefit Fund Litigation. In December 2019, a putative class action lawsuit was filed against the Company and more than thirty other pharmaceutical manufacturers in the U.S. District Court for the EDPA, captioned 1199SEIU National Benefit Fund et al. v. Actavis Holdco U.S., Inc., et al. The complaint purports to be brought on behalf of all persons and entities that indirectly purchased, paid, or provided reimbursement for the purchase of defendants' generic drugs, other than for resale, from May 2009 to the present. The lawsuit generally alleges that defendants conspired to allocate customers and fix prices for generic pharmaceutical drugs beginning in May 2009. The complaint seeks monetary damages and injunctive relief based on violations of Sections 1 and 3 of the Sherman Act and various state antitrust, consumer protection, and unjust enrichment claims. This lawsuit has been consolidated with the Generic Pricing MDL. An amended complaint was filed on January 7, 2021.
César Castillo, Inc., Litigation. In February 2020, a putative class action lawsuit was filed against the Company and more than thirty other pharmaceutical manufacturers in the U.S. District Court for the EDPA, captioned César Castillo, Inc., et al. v. Actavis Holdco U.S., Inc., et al. The lawsuit purports to be brought on behalf of all persons or entities that directly purchased certain generic drugs from defendants or from one of defendants' direct customers-where the direct customer is alleged to be a completely involved co-conspirator-between July 1, 2009, and the present. The complaint has similar allegations as the 1199SEIU National Benefit Fund litigation and seeks damages for violations of Sections 1 and 3 of the Sherman Act. This lawsuit has been consolidated with the Generic Pricing MDL.
The Kroger Co. Litigation. In February 2020, a proposed amended complaint filed in the U.S. District Court for the EDPA named the Company and several other pharmaceutical manufacturers as new defendants in an action captioned The Kroger Co., et al. v. Actavis Holdco U.S., Inc. et al. The lawsuit is brought by several entities that purportedly purchased generic drugs directly from defendants. The proposed amended complaint seeks monetary damages and injunctive relief for violations of Section 1 of the Sherman Antitrust Act, and is premised on facts similar to those alleged in the 1199SEIU National Benefit Fund and César Castillo litigations. This lawsuit has been consolidated with the Generic Pricing MDL. A revised motion for leave to file a proposed amended complaint was filed in September 2020 and remains pending.
State Attorneys General Litigation. In June 2020, the Company, along with more than 20 other pharmaceutical manufacturers, was named as a defendant in a lawsuit brought by Attorneys General for 51 States, Territories, and the District of Columbia. The lawsuit, filed in the U.S. District Court for the District of Connecticut, alleges that manufacturers of generic drugs conspired to fix prices for certain generic drugs by communicating in advance of price increases and agreeing to certain market share allocations amongst competitors to thwart competition. The lawsuit alleges that prices for the generic drugs at issue were inflated as a result of the
alleged conspiracies, causing harm to the U.S. healthcare system. The complaint seeks monetary damages and injunctive relief for violations of Section 1 of the Sherman Antitrust Act and various state antitrust, consumer protection, and unjust enrichment claims. This lawsuit has been consolidated with the Generic Pricing MDL. The Company disagrees with the Attorneys Generals’ characterization of the facts and applicable law.
Rite Aid Litigation. In July 2020, a direct action complaint filed in the U.S. District Court for the EDPA named the Company and several other pharmaceutical manufacturers as new defendants in an action captioned Rite Aid Corp. et al. v. Actavis Holdco U.S., Inc. et al. The lawsuit purports to be brought by entities that directly purchased generic drugs from defendants or a co-conspirator. The complaint seeks monetary damages and injunctive relief for violations of Section 1 of the Sherman Antitrust Act, and is premised on facts similar to those alleged in the State Attorneys General Litigation. This lawsuit has been consolidated with the Generic Pricing MDL.
Suffolk County, N.Y. Litigation. In August 2020, a direct action complaint filed in the U.S. District Court for the Eastern District of New York named the Company and several other pharmaceutical manufacturers as new defendants in an action captioned County of Suffolk v. Actavis Holdco U.S., Inc. et al. The lawsuit purports to be brought by Suffolk County, New York, which directly and indirectly purchased generic drugs from defendants or a co-conspirator. The complaint seeks monetary damages and injunctive relief for violations of Sections 1 and 3 of the Sherman Antitrust Act, the Donnelly Act, New York General Business Law § 340, and New York Social Services Law § 145-b, and is premised on facts similar to those alleged in the State Attorneys General Litigation. This lawsuit has been transferred to the U.S. District Court for the EDPA and consolidated with the Generic Pricing MDL.
J M Smith Litigation. In September 2020, a direct action complaint filed in the U.S. District Court for the EDPA named the Company and several other pharmaceutical manufacturers as new defendants in an action captioned J M Smith Corporation v. Actavis Holdco U.S., Inc. et al. The lawsuit purports to be brought by entities that directly purchased generic drugs from defendants or a co-conspirator. The complaint seeks monetary damages and injunctive relief for violations of Section 1 of the Sherman Antitrust Act, and is premised on facts similar to those alleged in the State Attorneys General Litigation. This lawsuit has been consolidated with the Generic Pricing MDL.
Walgreen Litigation. In December 2020, a direct action complaint filed in the U.S. District Court for the EDPA named the Company and other pharmaceutical manufacturers as defendants in an action captioned Walgreen Company v. Actavis Holdco U.S., Inc., et al. The plaintiff purports to have directly purchased generic drugs from defendants or a co-conspirator. The complaint seeks monetary damages and injunctive relief for violations of Section 1 of the Sherman Antitrust Act, and is premised on facts similar to those alleged in the State Attorneys General Litigation. This lawsuit has been consolidated with the Generic Pricing MDL.
Winn-Dixie Litigation. In December 2020, a direct action complaint filed in the U.S. District Court for the EDPA named the Company and other pharmaceutical manufacturers as defendants in an action captioned Winn-Dixie Stores, Inc., et al v. Actavis Holdco US, Inc., et al. The lawsuit purports to be brought by entities that directly purchased generic drugs from defendants or a co-conspirator. The complaint seeks monetary damages and injunctive relief for violations of Section 1 of the Sherman Antitrust Act, and is premised on facts similar to those alleged in the State Attorneys General Litigation. This lawsuit has been consolidated with the Generic Pricing MDL.
Canadian (Eaton) Litigation. In December 2020, the Company received a statement of claim filed in federal court in Toronto, Ontario, Canada, naming the Company, Mallinckrodt ULC, and certain other of the Company’s subsidiaries, as well as other pharmaceutical manufacturers, as defendants in an action captioned Kathryn Eaton v Teva Canada Limited et al. The claim purports to be brought on behalf of all persons or entities in Canada who, from January 1, 2012 to the present, purchased generic drugs in the private sector. The allegations and requests for relief in the statement of claim, in substance, are similar to those in the 1199SEIU National Benefit Fund litigation, and include the claim that the Company breached the Competition Act in Canada.
Xyrem Litigation
Self-Insured Schools Litigation. In August 2020, a complaint filed in the U.S. District Court for the Southern District of New York named the Company and several other pharmaceutical manufacturers as new defendants in an action captioned Self-Insured Schools of California v. Jazz Pharmaceuticals Plc et al. The lawsuit is brought on behalf of a purported class of individuals and entities that indirectly purchased Xyrem (sodium oxybate). The complaint alleges that Jazz Pharmaceuticals delayed generic competition by the Company and others by providing substantial consideration to the Company and others to delay market entry for sodium oxybate, causing consumers to pay supracompetitive prices for Xyrem and its generic bioequivalent products. The complaint seeks monetary damages and declaratory and injunctive relief for violations of Sections 1 and 3 of the Sherman Antitrust Act, Section 16 of the Clayton Antitrust Act, and various state antitrust laws and, state consumer protection statutes, and state laws prohibiting unfair and deceptive practices. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Hollman Litigation. In September 2020, a complaint filed in the U.S. District Court for the Northern District of California named the Company and several other pharmaceutical manufacturers as new defendants in an action captioned Ruth Hollman v. Jazz Pharmaceuticals Plc et al. The lawsuit is brought on behalf of a purported class of individuals and entities that indirectly purchased
Xyrem (sodium oxybate). The complaint alleges that Jazz Pharmaceuticals delayed generic competition by the Company and others by providing substantial consideration to the Company and others to delay market entry for sodium oxybate, causing consumers to pay supracompetitive prices for Xyrem and its generic bioequivalent products. The complaint seeks monetary damages and declaratory and injunctive relief for violations of Sections 1 and 3 of the Sherman Antitrust Act, Section 16 of the Clayton Antitrust Act, and various state antitrust laws, state consumer protection statutes, and state laws prohibiting unfair and deceptive practices. On November 3, 2020, the plaintiff dismissed the case against the Company and certain other defendants without prejudice. The lawsuit remains pending against several other defendants.
Environmental Remediation and Litigation Proceedings
The Company is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites, including those described below. The ultimate cost of site cleanup and timing of future cash outlays is difficult to predict, given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. The Company concluded that, as of December 25, 2020, it was probable that it would incur remediation costs in the range of $37.3 million to $85.8 million. The Company also concluded that, as of December 25, 2020, the best estimate within this range was $60.8 million, of which $1.0 million was included in accrued and other current liabilities and the remainder was included in environmental liabilities on the consolidated balance sheet as of December 25, 2020. While it is not possible at this time to determine with certainty the ultimate outcome of these matters, the Company believes, given the information currently available, that the final resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Lower Passaic River, New Jersey. The Company and approximately 70 other companies (“Cooperating Parties Group” or “CPG”) are parties to a May 2007 Administrative Order on Consent ("AOC") with the Environmental Protection Agency ("EPA") to perform a remedial investigation and feasibility study ("RI/FS") of the 17-mile stretch known as the Lower Passaic River ("the River") Study Area. The Company's potential liability stems from former operations at Lodi and Belleville, New Jersey.
In April 2014, the EPA issued a revised Focused Feasibility Study ("FFS"), with remedial alternatives to address cleanup of the lower 8-mile stretch of the River. The EPA estimated the cost for the remediation alternatives ranged from $365.0 million to $3.2 billion and the EPA's preferred approach had an estimated cost of $1.7 billion.
In April 2015, the CPG presented a draft of the RI/FS of the River to the EPA that included alternative remedial actions for the entire 17-mile stretch of the River.
On March 4, 2016, the EPA issued the Record of Decision ("ROD") for the lower 8 miles of the River with a slight modification on its preferred approach and a revised estimated cost of $1.38 billion. On October 5, 2016, the EPA announced that Occidental Chemicals Corporation ("OCC") had entered into an agreement to develop the remedial design.
On August 7, 2018, the EPA finalized a buyout offer of $280,600 with the Company, limited to its former Lodi facility, for the lower 8 miles of the River. During the three months ended September 28, 2018, the Company reduced the accrual associated with this matter by $11.8 million to $26.2 million, which represents the Company's estimate of its remaining liability related to the River.
Despite the issuance of the revised FFS and ROD by the EPA, the RI/FS by the CPG, and the cash out settlement by the EPA there are many uncertainties associated with the final agreed-upon remediation, potential future liabilities and the Company's allocable share of the remediation. Given those uncertainties, the amounts accrued may not be indicative of the amounts for which the Company may be ultimately responsible and will be refined as the remediation progresses.
Occidental Chemical Corp. v. 21st Century Fox America, Inc. The Company and approximately 120 other companies were named as defendants in a lawsuit filed in June 2018, by OCC, in which OCC seeks cost recovery and contribution for past and future costs in response to releases and threatened releases of hazardous substances into the lower 8 miles of the River. A former Mallinckrodt facility located in Jersey City, NJ (located in Newark Bay) and the former Belleville facility were named in the suit. Due to an indemnification agreement with AVON Inc., Mallinckrodt has tendered the liability for the Jersey City site to AVON Inc. and they have accepted. The Company retains a share of the liability for this suit related to the Belleville facility. A motion to dismiss several of the claims was denied by the court. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the ultimate resolution of all known claims, after taking into account amounts already accrued will not have a material adverse effect on its financial condition, results of operations and cash flows.
Crab Orchard National Wildlife Refuge Superfund Site, near Marion, Illinois. Between 1967 and 1982, International Minerals and Chemicals Corporation ("IMC"), a predecessor in interest to the Company, leased portions of the Additional and Uncharacterized Sites ("AUS") Operable Unit at the Crab Orchard Superfund Site ("the CO Site") from the government and manufactured various explosives for use in mining and other operations. In March 2002, the DOJ, the U.S. Department of the Interior and the EPA (together, "the Government Agencies") issued a special notice letter to General Dynamics Ordnance and Tactical Systems, Inc. ("General Dynamics"), one of the other potentially responsible parties ("PRPs") at the CO Site, to compel General Dynamics to perform the RI/
FS for the AUS Operable Unit. General Dynamics negotiated an AOC with the Government Agencies to conduct an extensive RI/FS at the CO Site under the direction of the U.S. Fish and Wildlife Service. General Dynamics asserted in August 2004 that the Company is jointly and severally liable, along with approximately eight other lessees and operators at the AUS Operable Unit, for costs associated with alleged contamination of soils and groundwater resulting from historic operations, and the parties have entered into a non-binding mediation process. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the final resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Products Liability Litigation
Beginning with lawsuits brought in July 1976, the Company is named as a defendant in personal injury lawsuits based on alleged exposure to asbestos-containing materials. A majority of the cases involve product liability claims based principally on allegations of past distribution of products containing asbestos. A limited number of the cases allege premises liability based on claims that individuals were exposed to asbestos while on the Company's property. Each case typically names dozens of corporate defendants in addition to the Company. The complaints generally seek monetary damages for personal injury or bodily injury resulting from alleged exposure to products containing asbestos. The Company's involvement in asbestos cases has been limited because it did not mine or produce asbestos. Furthermore, in the Company's experience, a large percentage of these claims have never been substantiated and have been dismissed by the courts. The Company has not suffered an adverse verdict in a trial court proceeding related to asbestos claims and intends to continue to defend these lawsuits. When appropriate, the Company settles claims; however, amounts paid to settle and defend all asbestos claims have been immaterial. As of December 25, 2020, there were approximately 11,800 asbestos-related cases pending against the Company.
The Company estimates pending asbestos claims, claims that were incurred but not reported and related insurance recoveries, which are recorded on a gross basis in the consolidated balance sheets. The Company's estimate of its liability for pending and future claims is based on claims experience over the past five years and covers claims either currently filed or expected to be filed over the next seven years. The Company believes that it has adequate amounts recorded related to these matters. While it is not possible at this time to determine with certainty the ultimate outcome of these asbestos-related proceedings, the Company believes, given the information currently available, that the ultimate resolution of all known and anticipated future claims, after taking into account amounts already accrued, along with recoveries from insurance, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Internal Revenue Code Section 453A Interest
As a result of historical internal installment sales, the Company has reported IRC §453A interest on its tax returns on the basis of its interpretation of the IRC. Alternative interpretations of these provisions could result in additional interest payable. Due to the inherent uncertainty in these interpretations, the Company has deferred the recognition of the benefit associated with the Company's interpretation and maintains a corresponding liability of $28.2 million and $47.4 million as of December 25, 2020 and December 27, 2019, respectively. The decrease of $19.2 million was recognized as a benefit to interest expense during fiscal 2020 due to lapses of certain statute of limitations. Further favorable resolution of this uncertainty would likely result in a material reversal of this liability and a benefit being recorded to interest expense within the consolidated statements of operations.
Tax Matters
In August 2020, a settlement was reached with the IRS related to the audit of MHP. Refer to Note 9 for further information.
Other Matters
The Company is a defendant in a number of other pending legal proceedings relating to present and former operations, acquisitions and dispositions. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its financial condition, results of operations and cash flows.
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21.
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Financial Instruments and Fair Value Measurements
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Fair value is defined as the exit price that would be received from the sale of an asset or paid to transfer a liability, using assumptions that market participants would use in pricing an asset or liability. The fair value guidance establishes a three-level fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs used in measuring fair value. The levels within the hierarchy are as follows:
Level 1— observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2— significant other observable inputs that are observable either directly or indirectly; and
Level 3— significant unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions.
The following tables provide a summary of the significant assets and liabilities that are measured at fair value on a recurring basis at the end of each period:
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December 25,
2020
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Quoted Prices in Active Markets for Identical Assets
(Level 1)
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Significant Other Observable Inputs
(Level 2)
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Significant Unobservable Inputs
(Level 3)
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Assets:
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Debt and equity securities held in rabbi trusts
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$
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33.0
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$
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23.5
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$
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9.5
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|
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$
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—
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Equity securities
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31.1
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31.1
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|
|
—
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—
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|
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$
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64.1
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|
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$
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54.6
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|
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$
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9.5
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|
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$
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—
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Liabilities:
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Deferred compensation liabilities (1)
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$
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38.0
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$
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—
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$
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38.0
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|
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$
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—
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Contingent consideration and acquired contingent liabilities (2)
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34.7
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—
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|
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—
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|
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34.7
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Settlement Warrants (2)
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—
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|
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—
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|
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—
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—
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|
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$
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72.7
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|
$
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—
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|
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$
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38.0
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$
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34.7
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(1)On November 16, 2020, the Debtors received approval from the Bankruptcy Court to maintain existing postretirement benefit plans during the pendency of the Chapter 11 Cases. For further information refer to Note 2.
(2)These liabilities are governed by executory contracts and recorded at their estimated allowed claim amount within liabilities subject to compromise on the consolidated balance sheet as of December 25, 2020. For further information on executory contracts and LSTC refer to Note 2.
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December 27,
2019
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
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Significant Other Observable Inputs
(Level 2)
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Significant Unobservable Inputs
(Level 3)
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Assets:
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|
|
|
|
|
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Debt and equity securities held in rabbi trusts
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$
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30.6
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|
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$
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21.0
|
|
|
$
|
9.6
|
|
|
$
|
—
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|
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Equity securities
|
26.2
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|
|
26.2
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|
|
—
|
|
|
—
|
|
|
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$
|
56.8
|
|
|
$
|
47.2
|
|
|
$
|
9.6
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deferred compensation liabilities
|
$
|
39.2
|
|
|
$
|
—
|
|
|
$
|
39.2
|
|
|
$
|
—
|
|
|
Contingent consideration and acquired contingent liabilities
|
69.3
|
|
|
—
|
|
|
—
|
|
|
69.3
|
|
|
Settlement Warrants
|
43.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
43.4
|
|
|
|
$
|
151.9
|
|
|
$
|
—
|
|
|
$
|
39.2
|
|
|
$
|
112.7
|
|
Debt and equity securities held in rabbi trusts. Debt securities held in rabbi trusts primarily consist of U.S. government and agency securities and corporate bonds. When quoted prices are available in an active market, the investments are classified as level 1. When quoted market prices for a security are not available in an active market, they are classified as level 2. Equity securities held in rabbi trusts primarily consist of U.S. common stocks, which are valued using quoted market prices reported on nationally recognized securities exchanges.
Equity securities. Equity securities consist of shares in Silence, for which quoted prices are available in an active market; therefore, the investment is classified as level 1 and is valued based on quoted market prices reported on an internationally recognized securities exchange.
In July 2019, the Company remitted $5.0 million of consideration to Silence in exchange for equity shares. As part of this equity investment, the Company took a non-executive Director seat on the Silence Board of Directors. The Company's investment in Silence qualifies for equity method accounting given its ability to exercise significant influence; however, the Company elected the fair value method to account for its investment in Silence. During fiscal 2020 and 2019, the Company recognized an unrealized gain of
$3.8 million and $20.2 million, respectively, related to this investment within other income, net in the consolidated statement of operations.
Deferred compensation liabilities. The Company maintains a non-qualified deferred compensation plan in the U.S., which permits eligible employees of the Company to defer a portion of their compensation. A recordkeeping account is set up for each participant and the participant chooses from a variety of funds for the deemed investment of their accounts. The recordkeeping accounts generally correspond to the funds offered in the Company's U.S. tax-qualified defined contribution retirement plan and the account balance fluctuates with the investment returns on those funds.
Contingent consideration and acquired contingent liabilities. As of December 25, 2020, the Company maintains various contingent consideration liabilities associated with the acquisitions of Stratatech Corporation ("Stratatech") and Ocera Therapeutics, Inc. ("Ocera"). Additionally, the Company historically maintained acquired contingent liabilities associated with the acquisition of Questcor.
In August 2014, the Company recorded acquired contingent liabilities of $195.4 million from the acquisition of Questcor. The contingent liabilities relate to Questcor's contingent obligations associated with their acquisition of an exclusive, perpetual and irrevocable license to develop, market, manufacture, distribute, sell and commercialize MNK-1411 (Synacthen) from Novartis and their acquisition of BioVectra. Under the terms of the license agreement with Novartis, the Company made a $25.0 million payment in fiscal 2020 and suspended its rights and obligations to Novartis under such agreement. As of December 25, 2020, there are no further contingent liabilities associated with Synacthen. The Company measured the fair value of the contingent payments based on a probability-weighted present value of the consideration expected to be transferred using a discount rate of 4.7%. The Company determined the fair value of these contingent consideration obligations associated with the acquisition of Questcor at December 25, 2020 and December 27, 2019 was zero and $24.5 million, respectively.
As part of the acquisition of Stratatech in August 2016, the Company provided contingent consideration to the prior shareholders of Stratatech, primarily in the form of regulatory filing and approval milestones associated with the deep partial-thickness and full-thickness indications associated with StrataGraft®. For each indication, the Company is responsible for a payment upon acceptance of the Company's submission and another upon approval by the FDA. Accordingly, upon acceptance by the FDA of the Company's deep partial-thickness submission during fiscal 2020, the Company made a $20.0 million payment to the prior shareholders of Stratatech. The Company assesses the likelihood of and timing of making such payments at each balance sheet date. The fair value of the contingent payments was measured based on the net present value of a probability-weighted assessment. The Company determined the fair value of the contingent consideration associated with the acquisition of Stratatech to be $19.1 million and $29.0 million at December 25, 2020 and December 27, 2019, respectively. As a result of the Chapter 11 Cases filed on October 12, 2020, this liability was reclassified to LSTC on the consolidated balance sheet as of December 25, 2020.
As part of the Ocera Acquisition, the Company provided contingent consideration to the prior shareholders of Ocera in the form of both patient enrollment clinical study milestones for intravenous and oral formulations of MNK-6105 and MNK-6106 and sales-based milestones associated with MNK-6105 and MNK-6106. The Company determined the fair value of the contingent consideration based on an option pricing model to be $15.6 million and $15.8 million as of December 25, 2020 and December 27, 2019, respectively. As a result of the Chapter 11 Cases filed on October 12, 2020, this liability was reclassified to LSTC on the consolidated balance sheet as of December 25, 2020.
All contingent consideration liabilities were classified as LSTC in the consolidated balance sheet as of December 25, 2020. The following table summarizes the fiscal 2020 activity for contingent consideration:
|
|
|
|
|
|
|
|
Balance as of December 27, 2019
|
$
|
69.3
|
|
|
|
|
|
|
|
|
Payments
|
(45.0)
|
|
|
Accretion expense
|
0.5
|
|
|
Fair value adjustments
|
9.9
|
|
|
Less: Liabilities subject to compromise
|
(34.7)
|
|
|
Balance as of December 25, 2020
|
$
|
—
|
|
New Opioid Warrants. In conjunction with the Company’s Chapter 11 filing on October 12, 2020, the Company entered into a RSA which includes a proposed resolution of all opioid-related claims against the Company and its subsidiaries that supersedes the Opioid-Related Litigation Settlement, as described further below in relation to the corresponding estimate of fair value as of December 27, 2019. The proposed resolution contemplates that, upon the Company's emergence from the Chapter 11 process, opioid claimants would receive warrants for approximately 19.99% of the reorganized Company's new outstanding shares (giving effect to the exercise of the warrants, but subject to dilution from equity reserved under the management incentive plan), exercisable at a strike price reflecting an aggregate equity value of $1,551.0 million. For further information on the terms of this amended proposed settlement, refer to Note 20.
The equity value for the reorganized Company upon the emergence from bankruptcy, for which the New Opioid Warrants value is based, cannot be determined. This projected equity value upon emergence is determined by the Company and its investment bankers in consultation with parties-in-interest in the bankruptcy, and will be included in the disclosure statement which will be used for
solicitation of votes on the Company's Plan after the disclosure statement is approved by the Bankruptcy Court. Critical inputs to the valuation are currently being analyzed by the Company and its advisors including but not limited to the impact to the Company’s business from the Chapter 11 process, the projected post-emergence cash flows of the reorganized Company, proofs of claim filed by creditors, the assumption/rejection of executory contracts, litigation claims and contingencies, claims to be reinstated upon emergence, and the completion of negotiations with creditor constituencies. Furthermore, the final terms of any resolution of opioid-related claims against the Company, including the terms upon which any New Opioid Warrants would be issued, are subject to Bankruptcy Court approval and other certain other conditions, which are outside of management control. Since these critical inputs to the valuation are unable to be assessed at the initial stages of bankruptcy, the Company cannot reasonably estimate the equity value upon emergence. As such, no value has been ascribed to the warrants as of December 25, 2020.
The estimated fair value for the New Opioid Warrants will be subject to revaluation at each balance sheet date with any changes in fair value recorded as a non-cash gain or (loss) in the consolidated statements of operations until the New Opioid Warrants are issued, at which point they will be recorded as equity or as a liability based upon the facts and circumstances at the time of issuance.
The fair value of the Settlement Warrants as of December 27, 2019 was estimated using the Black-Scholes pricing model and related terms as set forth in the now superseded Opioid-Related Litigation Settlement, which contemplated that the Company would issue to the Opioid Claimant Trust warrants, upon emergence from the Chapter 11 process contemplated by the Opioid-Related Litigation Settlement, to purchase ordinary shares of the Company with an eight year term at a strike price of $3.15 per ordinary share that would represent approximately 19.99% of the Company's fully diluted outstanding shares, including after giving effect to the exercise of the warrants, provided that such warrants may not be exercised during any calendar quarter in a quantity that would exceed 5.0% of the number of shares outstanding. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. The expected volatility assumption was based on the historical and implied volatility of the Company's peer group with similar business models. The expected term assumption was based on the contractual term of the Settlement Warrants. The expected annual dividend per share was based on the Company's current intentions regarding payment of cash dividends. The risk-free interest rate was based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term assumed.
The key assumptions used to estimate the fair value of the Settlement Warrants were as follows:
|
|
|
|
|
|
|
|
|
December 27, 2019
|
|
Expected share price volatility
|
54.4
|
%
|
|
Weighted-average risk-free rate
|
1.8
|
%
|
|
Expected annual dividend per share
|
—
|
%
|
|
Weighted-average expected term (in years)
|
7.6
|
|
Share price
|
$
|
3.45
|
|
Financial Instruments Not Measured at Fair Value
The following methods and assumptions were used by the Company in estimating fair values for financial instruments not measured at fair value as of December 25, 2020 and December 27, 2019:
•The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and the majority of other current assets and liabilities approximate fair value because of their short-term nature. The Company classifies cash on hand and deposits in banks, including commercial paper, money market accounts and other investments it may hold from time to time, with an original maturity of three months or less, as cash and cash equivalents (level 1). The fair value of restricted cash was equivalent to its carrying value of $56.4 million and $31.7 million as of December 25, 2020 and December 27, 2019, (level 1), respectively. As of December 25, 2020, $20.2 million and $36.2 million of the restricted cash balance was included in prepaid and other current assets and other assets, respectively, on the consolidated balance sheet. As of December 27, 2019, substantially all of the restricted cash was included in other assets on the consolidated balance sheet.
•The Company received a portion of consideration as part of contingent earn-out payments related to the sale of the Nuclear Imaging business in the form of preferred equity certificates during fiscal 2020, 2019 and 2018. On December 4, 2020, the Company received a $32.5 million cash payment from the issuer of these securities, which included $29.8 million for the redemption 100% of the outstanding preferred equity certificates and $2.7 million in accrued interest receivable. These securities were classified as held-to-maturity and carried at amortized cost, which approximated fair value (level 3), of zero and $18.9 million as of December 25, 2020 and December 27, 2019, respectively. These securities were included in other assets on the consolidated balance sheets.
•The Company's life insurance contracts are carried at cash surrender value, which is based on the present value of future cash flows under the terms of the contracts (level 3). Significant assumptions used in determining the cash surrender value include the amount and timing of future cash flows, interest rates and mortality charges. The fair value of these contracts approximates the carrying value of $52.3 million and $51.1 million at December 25, 2020 and December 27, 2019, respectively. These contracts are included in other assets on the consolidated balance sheets.
•The carrying value of the Company's revolving credit facility approximates the fair value due to the short-term nature of this instrument and is therefore classified as level 1. The Company's 4.75%, 4.875%, 5.50%, 5.625%, 5.75% and 10.00% first and second lien senior notes are classified as level 1, as quoted prices are available in an active market for these notes. Since the quoted market prices for the Company's term loans and 8.00% and 9.50% debentures are not available in an active market, they are classified as level 2 for purposes of developing an estimate of fair value. The following table presents the carrying values and estimated fair values of the Company's debt as of the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, 2020
|
|
December 27, 2019
|
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
4.875% senior notes due April 2020
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
614.8
|
|
|
$
|
480.0
|
|
|
5.75% senior notes due August 2022
|
|
610.3
|
|
|
191.2
|
|
|
610.3
|
|
|
251.0
|
|
|
4.75% senior notes due April 2023
|
|
133.7
|
|
|
11.1
|
|
|
133.7
|
|
|
53.7
|
|
|
5.625% senior notes due October 2023
|
|
514.7
|
|
|
158.9
|
|
|
514.7
|
|
|
193.2
|
|
|
5.50% senior notes due April 2025
|
|
387.2
|
|
|
115.4
|
|
|
387.2
|
|
|
135.5
|
|
|
10.00% first lien senior notes due April 2025
|
|
495.0
|
|
|
528.4
|
|
|
—
|
|
|
—
|
|
|
10.00% second lien senior notes due April 2025
|
|
322.9
|
|
|
279.0
|
|
|
322.9
|
|
|
253.8
|
|
|
Revolving credit facility
|
|
900.0
|
|
|
900.0
|
|
|
900.0
|
|
|
900.0
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
9.50% debentures due May 2022
|
|
10.4
|
|
|
4.2
|
|
|
10.4
|
|
|
5.4
|
|
|
8.00% debentures due March 2023
|
|
4.4
|
|
|
1.3
|
|
|
4.4
|
|
|
2.0
|
|
|
Term loan due September 2024
|
|
1,505.2
|
|
|
1,386.9
|
|
|
1,520.8
|
|
|
1,240.0
|
|
|
Term loan due February 2025
|
|
399.5
|
|
|
367.9
|
|
|
403.6
|
|
|
326.2
|
|
|
Total Debt
|
|
$
|
5,283.3
|
|
|
$
|
3,944.3
|
|
|
$
|
5,422.8
|
|
|
$
|
3,840.8
|
|
Concentration of Credit and Other Risks
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of accounts receivable. The Company generally does not require collateral from customers. A portion of the Company's accounts receivable outside the U.S. includes sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the financial stability and creditworthiness of those countries' national economies.
The following table shows net sales attributable to distributors that accounted for 10.0% or more of the Company's total segment net sales, which excludes the one-time charge related to the Medicaid lawsuit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
CuraScript, Inc.
|
27.4
|
%
|
|
29.7
|
%
|
|
35.2
|
%
|
|
|
|
|
|
|
|
|
AmerisourceBergen Corporation
|
*
|
|
10.2
|
|
|
*
|
|
|
|
|
|
|
|
* Net sales to this distributor were less than 10.0% of total net sales during the respective periods presented above.
The following table shows accounts receivable attributable to distributors that accounted for 10.0% or more of the Company's gross accounts receivable at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25,
2020
|
|
December 27,
2019
|
|
AmerisourceBergen Corporation
|
33.6%
|
|
31.3%
|
|
McKesson Corporation
|
18.2
|
|
15.3
|
|
CuraScript, Inc.
|
*
|
|
12.1
|
|
|
|
|
|
* Accounts receivable attributable to this distributor was less than 10.0% of total gross accounts receivable at the end of the respective period presented above.
The following table shows net sales attributable to products that accounted for 10.0% or more of the Company's total segment net sales, which excludes the one-time charge related to the Medicaid lawsuit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Acthar Gel
|
27.9
|
%
|
|
30.1
|
%
|
|
34.5
|
%
|
|
INOmax
|
20.9
|
|
|
18.1
|
|
|
16.9
|
|
|
Ofirmev
|
10.1
|
|
|
12.1
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
22.
|
Segment and Geographical Data
|
The Company operates in two reportable segments, which are further described below:
•Specialty Brands includes innovative specialty pharmaceutical brands; and
•Specialty Generics includes niche specialty generic drugs and API(s).
Management measures and evaluates the Company's operating segments based on segment net sales and operating income. Management excludes corporate expenses from segment operating income. In addition, certain amounts that management considers to be non-recurring or non-operational are excluded from segment net sales and operating income because management and the chief operating decision maker evaluate the operating results of the segments excluding such items. These items may include, but are not limited to, depreciation and amortization, share-based compensation, net restructuring, non-restructuring impairment charges, separation costs, R&D upfront payments, changes related to the Opioid-Related Litigation Settlement and the Acthar Gel Medicaid Retrospective Rebate incurred as a result of the Medicaid lawsuit. During the three months ended September 25, 2020, the Company began excluding depreciation and share-based compensation from its evaluation of the operating results of its segments. As a result, prior period segment operating income has been recast to reflect this change on a comparable basis. Although these amounts are excluded from segment net sales and operating income, as applicable, they are included in reported consolidated net sales and operating loss and are reflected in the reconciliations presented below.
Management manages assets on a total company basis, not by operating segment. The Company's chief operating decision maker does not regularly review any asset information by operating segment and, accordingly, the Company does not report asset information by operating segment. Total assets were approximately $9,715.4 million and $10,338.9 million as of December 25, 2020 and December 27, 2019, respectively.
Selected information by reportable segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Net sales:
|
|
|
|
|
|
|
Specialty Brands (1)
|
$
|
2,059.6
|
|
|
$
|
2,423.8
|
|
|
$
|
2,496.7
|
|
|
Specialty Generics
|
689.8
|
|
|
738.7
|
|
|
718.9
|
|
|
Segment net sales
|
2,749.4
|
|
|
3,162.5
|
|
|
3,215.6
|
|
|
Medicaid lawsuit (Note 20) (1)
|
(536.0)
|
|
|
—
|
|
|
—
|
|
|
Net sales
|
2,213.4
|
|
|
3,162.5
|
|
|
3,215.6
|
|
|
Operating (loss) income:
|
|
|
|
|
|
|
Specialty Brands
|
$
|
1,015.7
|
|
|
$
|
1,210.1
|
|
|
$
|
1,136.1
|
|
|
Specialty Generics
|
206.4
|
|
|
168.5
|
|
|
153.5
|
|
|
Segment operating income
|
1,222.1
|
|
|
1,378.6
|
|
|
1,289.6
|
|
|
Unallocated amounts:
|
|
|
|
|
|
|
Corporate and unallocated expenses (2)
|
(166.1)
|
|
|
(102.3)
|
|
|
(121.7)
|
|
|
Depreciation and amortization
|
(885.2)
|
|
|
(951.1)
|
|
|
(852.1)
|
|
|
Share-based compensation
|
(25.3)
|
|
|
(33.8)
|
|
|
(34.6)
|
|
|
Restructuring charges, net
|
(37.5)
|
|
|
1.7
|
|
|
(103.0)
|
|
|
Non-restructuring impairment charges
|
(63.5)
|
|
|
(388.0)
|
|
|
(3,893.1)
|
|
|
Separation costs (3)
|
(93.4)
|
|
|
(63.9)
|
|
|
(6.0)
|
|
|
R&D upfront payment (4)
|
(5.0)
|
|
|
(20.0)
|
|
|
—
|
|
|
Opioid-related litigation settlement gain (loss) (Note 20)
|
43.4
|
|
|
(1,643.4)
|
|
|
—
|
|
|
Medicaid lawsuit (Note 20) (1)
|
(641.1)
|
|
|
—
|
|
|
—
|
|
|
Operating loss
|
$
|
(651.6)
|
|
|
$
|
(1,822.2)
|
|
|
$
|
(3,720.9)
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Specialty Brands
|
$
|
799.3
|
|
|
$
|
862.4
|
|
|
$
|
762.5
|
|
|
Specialty Generics
|
85.9
|
|
|
88.7
|
|
|
89.6
|
|
|
|
$
|
885.2
|
|
|
$
|
951.1
|
|
|
$
|
852.1
|
|
(1)Specialty Brands net sales for fiscal 2020 includes the prospective change to the Medicaid rebate calculation, which served to reduce Acthar Gel net sales by $40.4 million for the period from June 15, 2020 through December 25, 2020. See Note 20 for further detail on the status of the Medicaid lawsuit.
(2)Includes administration expenses and certain compensation, legal, environmental and other costs not charged to the Company's reportable segments.
(3)Represents costs incurred related to the separation of the Company's Specialty Generics segment, inclusive of costs related to the suspended spin-off of that business and rebranding costs associated with the Specialty Brands ongoing transformation, all of which are included in SG&A.
(4)Represents R&D expense incurred related to an upfront payment made to acquire product rights in Japan for terlipressin during fiscal 2020 and an upfront payment made to Silence in connection with the license and collaboration agreement entered into in fiscal 2019. See Note 7 for further information.
Net sales by product family within the Company's reportable segments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Acthar Gel (1)
|
$
|
767.9
|
|
$
|
952.7
|
|
$
|
1,110.1
|
|
INOmax
|
574.1
|
|
571.4
|
|
542.7
|
|
Ofirmev
|
276.5
|
|
384.0
|
|
341.9
|
|
Therakos
|
238.6
|
|
246.9
|
|
231.2
|
|
Amitiza (2)
|
188.8
|
|
208.5
|
|
183.8
|
|
Other (3)
|
13.7
|
|
60.3
|
|
87.0
|
|
Specialty Brands
|
2,059.6
|
|
2,423.8
|
|
2,496.7
|
|
|
|
|
|
|
|
|
Hydrocodone (API) and hydrocodone-containing tablets
|
98.0
|
|
76.3
|
|
65.9
|
|
Oxycodone (API) and oxycodone-containing tablets
|
68.4
|
|
74.9
|
|
66.1
|
|
Acetaminophen (API)
|
213.0
|
|
189.9
|
|
192.7
|
|
Other controlled substances
|
289.9
|
|
352.5
|
|
343.8
|
|
Other
|
20.5
|
|
45.1
|
|
50.4
|
|
Specialty Generics
|
689.8
|
|
738.7
|
|
718.9
|
|
Segment net sales
|
2,749.4
|
|
3,162.5
|
|
3,215.6
|
|
Medicaid lawsuit (Note 20)
|
536.0
|
|
—
|
|
—
|
|
Net Sales
|
$
|
2,213.4
|
|
$
|
3,162.5
|
|
$
|
3,215.6
|
(1)Fiscal 2020 includes the prospective change to the Medicaid rebate calculation of $40.4 million for the period from June 15, 2020 through December 25, 2020. See Note 20 for further detail on the status of the Medicaid lawsuit.
(2)Amitiza net sales consist of both product and royalty net sales. Refer to Note 5 for further details on Amitiza's revenues.
(3)Fiscal 2019 and fiscal 2018 includes $40.1 million and $53.1 million of net sales, respectively, related to BioVectra prior to the completion of the sale of this business in November 2019. Refer to Note 6 for further details.
Selected information by geographic area was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2020
|
|
2019
|
|
2018
|
|
Net sales (1):
|
|
|
|
|
|
|
U.S.
|
$
|
2,465.5
|
|
|
$
|
2,765.6
|
|
|
$
|
2,834.5
|
|
|
Europe, Middle East and Africa
|
227.5
|
|
|
281.8
|
|
|
256.8
|
|
|
Other
|
56.4
|
|
|
115.1
|
|
|
124.3
|
|
|
Geographic area net sales
|
2,749.4
|
|
|
3,162.5
|
|
|
3,215.6
|
|
|
Medicaid lawsuit (Note 20)
|
(536.0)
|
|
|
—
|
|
|
—
|
|
|
Net Sales
|
$
|
2,213.4
|
|
|
$
|
3,162.5
|
|
|
$
|
3,215.6
|
|
|
|
|
|
|
|
|
|
|
December 25,
2020
|
|
December 27,
2019
|
|
|
|
Long-lived assets (2):
|
|
|
|
|
|
|
U.S.
|
$
|
676.3
|
|
|
$
|
734.3
|
|
|
|
|
Europe, Middle East and Africa (3)
|
165.5
|
|
|
169.9
|
|
|
|
|
Other
|
4.6
|
|
|
4.8
|
|
|
|
|
|
$
|
846.4
|
|
|
$
|
909.0
|
|
|
|
(1)Net sales are attributed to regions based on the location of the entity that records the transaction, none of which relate to the country of Ireland.
(2)Long-lived assets are primarily composed of property, plant and equipment, net.
(3)Includes long-lived assets located in Ireland of $164.0 million and $168.4 million as of December 25, 2020 and December 27, 2019, respectively.
|
|
|
|
|
|
|
|
23.
|
Selected Quarterly Financial Data (Unaudited)
|
A summary of quarterly financial information for fiscal 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
March 27,
2020
|
|
June 26,
2020
|
|
September 25,
2020
|
|
December 25,
2020
|
|
Net sales (1)
|
$
|
665.8
|
|
|
$
|
166.5
|
|
|
$
|
698.3
|
|
|
$
|
682.8
|
|
|
Gross profit
|
283.8
|
|
|
(220.2)
|
|
|
295.3
|
|
|
310.5
|
|
|
(Loss) income from continuing operations (1)
|
(56.7)
|
|
|
(950.6)
|
|
|
191.8
|
|
|
(154.2)
|
|
|
Income (loss) from discontinued operations
|
6.5
|
|
|
17.5
|
|
|
(0.2)
|
|
|
1.3
|
|
|
Net (loss) income
|
(50.2)
|
|
|
(933.1)
|
|
|
191.6
|
|
|
(152.9)
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share from continuing operations (2)
|
$
|
(0.67)
|
|
|
$
|
(11.25)
|
|
|
$
|
2.27
|
|
|
$
|
(1.82)
|
|
|
Diluted (loss) earnings per share from continuing operations (2)
|
(0.67)
|
|
|
(11.25)
|
|
|
2.27
|
|
|
(1.82)
|
|
|
|
|
|
For the Quarter Ended
|
|
|
March 29,
2019
|
|
June 28,
2019
|
|
September 27,
2019
|
|
December 27,
2019
|
|
Net sales
|
$
|
790.6
|
|
|
$
|
823.3
|
|
|
$
|
743.7
|
|
|
$
|
804.9
|
|
|
Gross profit
|
335.1
|
|
|
388.9
|
|
|
324.3
|
|
|
373.1
|
|
|
Income (loss) income from continuing operations (3)
|
155.2
|
|
|
(0.5)
|
|
|
(0.9)
|
|
|
(1,161.0)
|
|
|
(Loss) income from discontinued operations
|
(0.3)
|
|
|
7.3
|
|
|
(0.2)
|
|
|
3.9
|
|
|
Net income (loss)
|
154.9
|
|
|
6.8
|
|
|
(1.1)
|
|
|
(1,157.1)
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share from continuing operations (2)
|
$
|
1.86
|
|
|
$
|
(0.01)
|
|
|
$
|
(0.01)
|
|
|
$
|
(13.80)
|
|
|
Diluted earnings (loss) per share from continuing operations (2)
|
1.83
|
|
|
(0.01)
|
|
|
(0.01)
|
|
|
(13.80)
|
|
(1)For the quarter ended June 26, 2020, net sales includes retrospective one-time charge of $534.4 million and loss from continuing operations included an additional charge of $105.3 million related to the Medicaid lawsuit. See Note 20 for further information.
(2)Quarterly and annual computations are prepared independently. Therefore, the sum of each quarter may not necessarily total the fiscal period amounts noted elsewhere within this Annual Report on Form 10-K.
(3)Loss from continuing operations for the quarter ended December 27, 2019 reflects the opioid-related litigation settlement charge of $1,643.4 million. See Note 20 for further information.
Joinder and Amendment to the RSA
On March 10, 2021, the Company announced that the Debtors have agreed to a joinder and amendment to the RSA (the "Joinder and Amendment") whereby an ad hoc group of lenders holding approximately $1,300.0 million, by aggregate principal amount, of the Company’s outstanding 2017 Term Loan and the Company's outstanding 2018 Term Loan (the "Supporting Term Lenders") have agreed to join the RSA as supporting parties and certain of the existing supporting parties have agreed to certain amendments thereto. Pursuant to the terms of the Joinder and Amendment, the RSA, as set forth in Note 2, will be amended as follows:
•The supporting parties under the RSA, including the Supporting Term Lenders, will support a plan of reorganization providing for distributions to lenders holding allowed claims in respect of the Company's senior secured term loans a mandatory prepayment in an amount equal to approximately $114.0 million arising from excess cash flow with respect to fiscal 2020 (if not previously paid following Bankruptcy Court approval thereof) (the "ECF Payment") and either (1) new senior secured term loans in an amount equal to the remaining principal amount of claims (as reduced by, inter alia, the ECF Payment) bearing interest at a rate per annum equal to LIBOR plus 5.25% (with respect to the 2017 Term Loan) or LIBOR plus 5.50% (with respect to the 2018 Term Loan) (the "Adjusted Interest Rate"), maturing on the earlier of September 30, 2027 and 5.75 years after emergence and without any financial maintenance covenant or (2) payment in full in cash.
•The Debtors will seek Bankruptcy Court approval to make ongoing adequate protection interest payments in respect of the senior secured term loans at the Adjusted Interest Rate.
•The Debtors will seek Bankruptcy Court approval to pay an exit fee equal to 0.5% of the principal amount of the senior secured term loans (after giving effect to the ECF Payment), which fee will increase to 1.0% of such principal amount if the senior secured term loans are not paid in full in cash through the plan.
•Certain milestones were adjusted with the consent of the supporting parties.
The Joinder and Amendment is not yet effective and shall become effective upon receipt of signatures thereto from (i) lenders holding 66.7% of each of the Company's outstanding 2017 Term Loan and the 2018 Term Loan, (ii) the required supporting unsecured noteholders, (iii) the governmental plaintiff ad hoc committee and (iv) the multi-state governmental entities group.
Commitments and Contingencies
Certain litigation matters occurred in fiscal 2020 or prior but had subsequent updates through the date of this report. See further discussion in Note 20.